1. Americas Desk OECD Development Centre LAC Fiscal Policy Forum Panama, September 16 th 2010 Fiscal policy in Latin America: Fiscal legitimacy and net tax/benefit position

2. 2 Fiscal policy in Latin America: Legitimacy and tax-benefit position Public expenditure on in-kind and cash transfers (Percentage of GDP, 2005) Tax collection (Percentage of GDP, 2008) High inequality, low tax collection, and weak fiscal redistribution Is the social contract broken in Latin America?

3. 3 Tax policy cannot be analyzed separately from expenditures Tax 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? Fiscal policy in Latin America: Legitimacy and tax-benefit position

4. 4 Perceptions about fiscal policy Perceptions about taxation (2007-2008 round)

5. 5 Satisfaction with public services (2007-2008 round) Perceptions about fiscal policy

6. 6 Latinobarometro surveys, 2007 and 2008 rounds. PROBIT modelling Dependent variables Fiscal 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) Perceptions about fiscal policy

7. 7 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, Meritocracy Success 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/benefits Satisfaction with democracy, health care, education and pensions Perceptions about fiscal policy

8. 8 Taxation for more representation? Results at a glance LegitimacyTax are too highMore redistribution Education +- +/- Middle class + /+ - /- Public services (educ., health) +-+ POUM + /+ - - Meritocracy n.a. -+ All regressions include country, ethnicity, marital status and employment status Bold: significant at 5 per cent (at least) Perceptions about fiscal policy

9. 9 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

10. 10 Fiscal policy effects on households’ incomes Cash transfers EducationHealthTaxes 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 and Excises. Mexico: Health SSC, Income taxes, VAT and Excises.

11. 11 Fiscal policy effects on households’ incomes Tax-benefit structure by household income deciles (Percentage of the decile mean disposable income) ChileMexico

12. 12 Fiscal policy effects on households’ incomes Benefits structure by household income deciles (Percentage of the decile disposable income, 2006) ChileMexico Education and health are the most important items in improving poor families’ income 0% 20% 40% 60% 80% 100% 120% IIIIIIIVVVIVIIVIIIIXX Cash transfersEducationHealth 0% 20% 40% 60% 80% 100% 120% IIIIIIIVVVIVIIVIIIIXX Cash transfersEducationHealth

13. 13 Contrasting data and perceptions about fiscal policy Benefits structure by household income deciles (Percentage of the decile disposable income, 2006) Satisfaction with health services (Percentage of respondents)

14. 14 Fiscal policy in Latin America: Legitimacy and tax-benefit position 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