Download Andres Rius

Uruguay’s progressive tax
reform : why didn’t it fail?
Andrés Rius
Universidad de la República
Uruguay
December 11, 2012
The presentation
• Introduction: the reform
• “The battle for the middle class”
• The weaknesses of “the rich”
• Implications
The presentation
• Introduction: the reform
• “The battle for the middle class”
• The weaknesses of “the rich”
• Implications
The reform in a nutshell
• Eliminated distortionary and low
productivity taxes, and ad hoc special
regimes
• Consolidated indirect taxes into VAT,
reduced rates; kept exemptions, and taxes
on specific consumptions
• Substituted schedular taxes with single,
broad-based PIT (IRPF), with dual taxation
on income
• Unified taxes on corporate profits
A progressive reform, in line with the
P.E. and institutionalist literatures
• No fiscal crisis but awareness of “social debt”
from 2001-02 crisis (pull from expend. side)
• Administrative capacity: acceptable and
improving
• First administration of a left-of-center
coalition, with absolute majority in
Parliament
• Reform launched right after election, with the
economy growing fast
More “winners” than “losers”
The presentation
• Introduction: the reform
• “The battle for the middle class”
• The weaknesses of “the rich”
• Implications
The battle
• Reformers, “supporters” and opposition
believed the middle class was going to be
or feel hurt
• Confirmed by polls: majority of public
opinion was against the new PIT
• …yet, all professional estimates showed
a large majority (more than 80% in
some) were going to win or stay the
same
The government couldn’t win
1. Voters can’t compute net outcome of
complex reform, have reasons to be
skeptical of interested parties, and few
will seek advice to find out who’s right
2. Faced with resulting uncertainty, they
look for signals, may favor status quo
3. Opinions/attitudes of peers and those
known to be richer/poorer frame the
voters reasoning about what to expect
The government couldn’t win
4. Politicians assume that being on the side
of the “middle class” is a winning strategy
(and reformers struggled to remain on
that side)
5. …but everyone thinks (s)he is “middle
class”…
We’re all middle class
Source: Cruces, Pérez-Truglia, Tetaz (2011) “Biased
perceptions of income distribution…”, IZA DP No. 5699, May
The presentation
• Introduction: the reform
• “The battle for the middle class”
• The weaknesses of “the rich”
• Implications
Behavior of “the rich” in context
Behavior of “the rich” in context
Values, ideas
Political strength
The issue
• The “rich” (proxied by top 10%) felt
correctly that they were going to lose
• Why didn’t they develop more decisive
and effective opposition? (the nature of
“compliance”: ¿convictions or weakness?)
A weak economic elite
• ideologically and organizationally
divided
• sparse personal linkages with the
political elite
The party system
• Institutionalized: Limits the influence
campaign money can buy
• Catch-all: augments the cost for
politicians of playing “the voice of the
injured” (a privileged minority)
The presentation
• Introduction: the reform
• “The battle for the middle class”
• The weaknesses of “the rich”
• Implications
Implications (1): cognitive
constraints & biases
• Progressive reforms can succeed despite public
opinion
• If everyone feels is “middle class”, the battle
can’t be won A progressive agenda will always
bring about negative outcome for sectors that
are richer than MC but don’t feel that way
Implications (2): cognitive
constraints & biases
• Perception biases create a “pincer effect”: the
rich feel unfairly taxed “as if they were rich”,
the poor (less informed) can be mobilized to
deffend “the middle class”
• If government gets fixated with winning it
(bounded rationality of policymakers) may get
distracted from key tasks,
• But battle has to be fought, with information
(biased but not impervious)
Implications (3):
“…but it wasn’t lost”
• Challenges were limited and handled through
the institutions
• The government was re-elected with almost
the same share of the vote
• No anti-reform movement so far
• Informing voters, worked
• Growth probably helped
• … it must be fought, but don’t expect to win it
Implications (4):
learning from the weak rich
• Ideologically united: debate vertical and
horizontal equity, expose “unfair” special
treatments (within elites and uppermiddle classes), use “consulta pública”
• Organizationally united: set up parallel
tables for “productive policies” (e.g., tax
incentives for investment promotion)
Implications (5):
learning from the weak rich
• Socially cohesive, inter-married and
exclusively schooled elites: the hardest to
tackle? Cause of LA’s democracy without
redistribution? Use “modernity”
demonstration effects?
• Weakly institutional & class-based parties:
set up a catch-all coalition for progressive
tax reform, get support of visible achievers