Taxing the Rich − What Makes the High-Income Earners Consent to more Progressive Taxation in Latin America?

When do the rich get ‘on board’ the fiscal contract and accept to pay a bigger share of the tax burden? We address this crucial question for low- and middle-income economies using a micro-level approach. Numerous studies indicate that the enduring high levels of inequality in developing countries are a result of low levels of public revenue available for investment in redistribution. Focusing on the revenue part of public finances, it is noteworthy that progressive tax types perform particularly poor in developing countries. This suggests that the high-income group is contributing little to sustain the public system and fiscal efforts in these countries. However, precisely in these contexts, getting high-income earners to contribute via taxation is key because poorer segments of society do not have the financial capacity to shoulder the weight of more ambitious fiscal systems. We argue that in order to accept more progressive taxation high-income earners need to have certainty about the return to taxes that they can expect as exchange for their contributions. Not being able to force compliance from the rich via coercion, high-income earners need to be convinced to ‘invest’ in the public system via taxes. The notions of trust, credibility, and certainty about the expected returns are decisive factors shaping this decision, so that the state and other taxpayers must be perceived as reliable players in the public goods game. We study tax composition preferences of a cross-section of Latin American countries using public opinion data from LAPOP for the year 2012. Findings reveal that both higher interpersonal trust and trust in public institutions strongly mitigate the opposition of high-income earners to more progressive taxation. Our results support the claim that the high-income earners’ acceptance of progressive income taxation will hinge upon the existence of a more reliable and credible socio-political environment.