Strategies for Taxing Economic Elites: The Chilean Experience Tasha Fairfield

1. Strategies for Taxing Economic Elites: The Chilean Experience Tasha Fairfield T.A.Fairfield@lse.ac.uk Dept. of International Development London School of Economics

2. Research Questions When can governments increase taxation of economic elites? How much scope for reform can they create? Overview Obstacles to taxing elites investment power & political power Reform Strategies Cases from Chile 2

3. Obstacles to Reform Taxing economic elites will be difficult when either Investment Power or Political Power is strong 3

4. Obstacles to Reform Taxing economic elites will be difficult when either Investment Power or Political Power is strong Investment Power (Structural Power:Block 1977, Lindblom 1982, Przeworski & Wallerstein 1988) Market-coordinated investment decisions Source: Perceived threat of reduced investment 3

5. Obstacles to Reform Taxing economic elites will be difficult when either Investment Power or Political Power is strong Investment Power (StructuralPower: Block 1977, Lindblom 1982, Przeworski & Wallerstein 1988) Market-coordinated investment decisions Source: Perceived threat of reduced investment • Political Power • (Instrumental Power: Mills 1956, Miliband 1969) • Deliberate political actions • Sources: Relationships and Resources 3

6. Obstacles to Reform Sources of Political Power 4

7. Reform Strategies Facilitate modest tax increases on powerful economic elites 5

8. Reform Strategies

9. Chile, Argentina & Bolivia Successful cases of market-oriented tax reform But recurrent revenue needs in 1990s and 2000s 7

10. Chile, Argentina & Bolivia Income, profits, and wealth are major, under-taxed revenue bases Governments considered increasing direct taxes 8

11. Explaining Tax Policy Outcomes Chile: marginal increases Strong business power  key reforms off agenda Argentina: significant increases Weaker business power  more leeway to tax Bolivia: mixed results Business power + Popular mobilization  Domestic elites not taxed, but big hydrocarbon royalty increases

12. Explaining Tax Policy Outcomes • Chile: marginal increases • Strong business power  key reforms off agenda • Sources of Political Power • Organization • Partisan Linkages: right parties strong in senate

13. Chilean Tax Reforms 12

14. Chilean Tax Reforms 12

15. Chile Anti-evasion reform, 2001 Equity appeals: • Vertical: “When you go to buy a kilo of bread, you pay 18% VAT. You have no trick, no mechanism for paying less. The poor pay all their taxes. And it is just [fair] that the rich pay all their taxes.” –Pres. Lagos • Horizontal: “Tax evasion entails great inequity between those who comply with their tax obligations and those who do not. …from an ethical perspective, no one can oppose an initiative that pursues compliance with the law?” –Reform Proposal Applied to income tax base-broadening measures: • Use of legal tax benefits ~ avoidance ~ evasion ~ morally unacceptable • Fighting evasion, not increasing taxes • “Trojan Horse” 13

16. Chile Anti-evasion reform, 2001 Modest success: • The right was in an “absolutely defensive position.” –Former senate president (interview) • “The [bill’s] title—evasion—it suggests going after criminals. It’s very difficult to oppose someone who presents that framing” –Right-party senator (interview) • Right abstentions (vs. rejection) in finance committee: “otherwise, President Lagos would have said that the opposition is against combatting tax evasion ” –Right-party senators (El Mercurio) Limitations: insufficient to enact reform Significant concessions negotiated with business and right Voter-party linkages: right draws support from popular sectors through clientelism and charismatic appeals (Luna 2010)  minimal electoral impact 14

17. Chile Stock-owner tax benefit elimination, 2005 Opportunity:Competition from the Right over inequality 15

18. Chile Stock-owner tax benefit elimination, 2005 Opportunity:Competition from the Right over inequality • “Inequality, Mr. President, continues. There is a Chile that grows, but it is for the few, and the great majority have not yet benefited.” –Pres. Candidate Joaquín Lavín (El Mercurio 5/7/05) 15

19. Chile Stock-owner tax benefit elimination, 2005 Opportunity:Competition from the Right over inequality • “Inequality, Mr. President, continues. There is a Chile that grows, but it is for the few, and the great majority have not yet benefited.” –Pres. Candidate Joaquín Lavín (El Mercurio 5/7/05) Vertical Equity Appeal: • “The infamous article ‘57 bis’ [tax benefit] represents a tremendous support for inequality. Instead of just talking, why don’t we agree to eliminate ‘57 bis’ in less than 24 hours?” –Pres. Ricardo Lagos (El Mercurio 5/10/05) 15

20. Chile Stock-owner tax benefit elimination, 2005 Opportunity:Competition from the Right over inequality • “Inequality, Mr. President, continues. There is a Chile that grows, but it is for the few, and the great majority have not yet benefited.” –Pres. Candidate Joaquín Lavín (El Mercurio 5/7/05) Vertical Equity Appeal: • “The infamous article ‘57 bis’ [tax benefit] represents a tremendous support for inequality. Instead of just talking, why don’t we agree to eliminate ‘57 bis’ in less than 24 hours?” –Pres. Ricardo Lagos (El Mercurio 5/10/05) Success: High salience of inequality during campaign 15

21. Chile Stock-owner tax benefit elimination, 2005 Opportunity:Competition from the Right over inequality • “Inequality, Mr. President, continues. There is a Chile that grows, but it is for the few, and the great majority have not yet benefited.” –Pres. Candidate Joaquín Lavín (El Mercurio 5/7/05) Vertical Equity Appeal: • “The infamous article ‘57 bis’ [tax benefit] represents a tremendous support for inequality. Instead of just talking, why don’t we agree to eliminate ‘57 bis’ in less than 24 hours?” –Pres. Ricardo Lagos (El Mercurio 5/10/05) Success: High salience of inequality during campaign “The opposition accepted things that usually it was not willing to accept so as not to harm the presidential option.” –UDI Deputy (author’s interview 12/23/05) 15

22. Findings and Implications • Argument: • When economic elites have strong political and/or investment power, substantial tax increases are unlikely. • However, reform strategies can make incremental progressive tax increases feasible. Policy Implications: • Pursue incremental rather than comprehensive reform • Employ multiple strategies where possible • Reform design and reform strategies must be tailored to the context at hand 22

23. Chile Tax Reforms 12