Lecture
PE_PP talk: The political cost of tax reform
- Date
- Monday 14 April 2025
- Time
- Address
-
Wijnhaven
Turfmarkt 99
2511 DP The Hague - Room
- 2.17
Although tax revenues have been growing since the 1990s, by 2015, average tax revenues across Latin America were, on average, nearly 12 per cent less than the OECD average. Today, many of the region’s tax systems struggle with progessivity. Why has it proven so difficult to reform the tax structure across the region? Existing work largely relates the deficiencies in Latin American tax structures to macro-level determinants, including the structural and instrumental power of business groups. We argue that part of the reason for the stickiness of sub-optimal tax structures lies in the lack of an electoral incentive for politicians to engage in tax reform. In fact, there may even be a political cost associated with tax reform. While there is a reasonably extensive literature exploring the electoral cost of taxation, there has been little effort to explore this issue in emerging economies, where public goods provision is often narrow and truncated and where quasi-voluntary compliance is weak. What is more, establishing the causal link between tax reform and government support is a challenge. We try and test our argument and estimate the causal effect of tax reform on political support by exploiting the announcement of a comprehensive tax reform in Colombia in April 2021 as a semi-natural experiment. Using the Unexpected Events during Survey Design (UESD) method, we demonstrate that the announcement of the tax reform caused a significant decrease in government approval. It also caused a significant decrease in confidence in local government, which does not seem to be driven by a more general pocketbook effect or collapse in normative democratic support. We think our results suggest that the effect might be rooted in perceptions of reciprocity.