Americas Desk OECD Development Centre

Americas Desk

OECD Development Centre

LAC Fiscal Policy Forum

Panama, September 16th 2010

Fiscal policy in Latin America: Fiscal legitimacy and net tax/benefit position

2

Fiscal policy in Latin America: Legitimacy and tax-benefit position

Public expenditure on in-kind and cash transfers(Percentage of GDP, 2005)

0

5

10

15

20

25

30

35

40

Mex

ico

Kore

aCh

ileTu

rkey

Irela

ndSl

ovak

Rep

.Ca

nada

Aust

ralia

Uni

ted

Stat

esJa

pan

Czec

h Re

p.N

ethe

rland

sG

reec

eIc

elan

dN

ew Z

eala

ndSp

ain

Switz

erla

ndLu

xem

bour

gPo

land

Nor

way

Uni

ted

King

dom

Hun

gary

Port

ugal

Italy

Ger

man

yFi

nlan

dBe

lgiu

mAu

stria

Denm

ark

Fran

ceSw

eden

OEC

D-31

Social services (a) Health services Education services Cash transfers (b)

0%

5%

10%

15%

20%

25%

30%

35%

40%

OECD LA Brazil Chile Mexico

Tax collection(Percentage of GDP, 2008)

High inequality, low tax collection, and weak fiscal redistributionIs the social contract broken in Latin America?

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Tax policy cannot be analyzed separately from expendituresTax collection affects the amount that can be assigned to public expenditures

Agents may be willing to pay higher taxes if they receive more/better public services

Two questions were explored

• How fiscal policy is perceived by Latin American citizens?• How fiscal policy affects households’ incomes?


4

Perceptions about fiscal policy

30

35

40

45

50

55

60

Q1 Q2 Q3 Q4 Q5

"Good Citizens pay their taxes"(percentage of respondents who

agree)

25

30

35

40

45

50

Q1 Q2 Q3 Q4 Q5

"Taxes are too high"(percentage of respondents who

agree)

Perceptions about taxation(2007-2008 round)

5

Satisfaction with public services(2007-2008 round)

-

20

40

60

80

100

Q1 Q2 Q3 Q4 Q5

Satisfaction with health services(percentage of respondents)

Satisfied Not Satisfied No Access


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• Latinobarometro surveys, 2007 and 2008 rounds. PROBIT modelling

• Dependent variablesFiscal legitimacy

Do you think that good citizens should pay taxes?

‘Optimal’ level of taxes: Do you think taxes are too high?

Demand for redistribution: State should intervene in health / education /

pension

Taxation for more representation? Empirical approach (I)


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Taxation for more representation? Empirical approach (and II)

• Explanatory variables

Education: years of education

(Auto-reported) Social class: five quintiles (middle II-IV)

POUM: Past mobility, and future mobility,

MeritocracySuccess depends on hard work rather than connections, a

poor person in my country can become rich working hard, life chances are independent of origin

(Perceived) Link tax/benefitsSatisfaction with democracy, health care, education and

pensions


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Taxation for more representation? Results at a glance

Legitimacy Tax are too high More redistribution

Education + - +/-

Middle class +/+ -/- -/-

Public services(educ., health)

+ - +POUM +/+ - -

Meritocracyn.a. - +

All regressions include country, ethnicity, marital status and employment status Bold: significant at 5 per cent (at least)


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Fiscal policy effects on households’ incomes

Households surveys

Government statements

National Accounts

New income distribution

Utilization of services: 2006 National Characterization Socio-economic Survey (CASEN) and 2006-07 Family Budget Survey (EPF).

2006 Household Income Survey (ENIGH)

Tax-benefit incidence analysis rely on different sources of information and uses imputation techniques to splice them together.

Health, education and taxes: Data at institutional level from the Chilean National Budget Office (DIPRES) and the Mexican Secretary of Public Finance and Credit (SHCP)

Indirect taxes: Estimation of budget shares on consumption from I-O tables

Previous income distribution

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Cash transfers Education Health Taxes

Chile:

Chile Solidarity, United family subsidies (SUF), Family allowance, Potable water subsidy, PASIS assistance pension and others.

Mexico:

Oportunidades and Procampo.

Chile:

Educational services, School feeding program,Health and oral school programs,School materials and textbooks and others.

Mexico:

Educational services and School scholarships.

Chile:

Health care net benefits, Supplementary Feeding Program (PNAC) and Complementary Food Program to older people (PACAM).

Mexico:

Health care net benefits.

Chile:

Health SSC, Income taxes, VAT andExcises.

Mexico:

Health SSC, Income taxes, VAT andExcises.

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Tax-benefit structure by household income deciles(Percentage of the decile mean disposable income)

Chile Mexico

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

I II III IV V VI VII VIII IX X

Taxes Social spending Net transfers

-40%

-20%

0%

20%

40%

60%

80%

100%

120%


Taxes Social spending Net transfers

12

Fiscal policy effects on households’ incomesBenefits structure by household income deciles(Percentage of the decile disposable income, 2006)

Chile Mexico

Education and health are the most important items in improving poor families’ income

0%

20%

40%

60%

80%

100%

120%


Cash transfers Education Health

0%

20%

40%

60%

80%

100%

120%



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Contrasting data and perceptions about fiscal policyBenefits structure by household income deciles(Percentage of the decile disposable income, 2006)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%



Satisfaction with health services(Percentage of respondents)

-

10

20

30

40

50

60

70

80

90

100

Q1 Q2 Q3 Q4 Q5

Satisfied Not Satisfied No Access

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Conclusions

• From perceptions in LAC• Potential demand for an stronger social contact?• Better services, and in particular better education may trigger a

virtuous circle

• To the data in Chile and Mexico• Tax/benefit systems strengthen the middle class• Education and health are the most important items in improving

poor families’ income

Documents

Americas Desk OECD Development Centre