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The US electoral campaign and President’s Obama renewed focus on reducing inequality has triggered a debate in the blog community regarding redistributive policies. Discussions have centered on the causes and consequences of inequality, on social mobility, the role of public programs (such as unemployment insurance and minimum wage laws) and taxation.
In a recent paper with Martin Ardanaz, (“Inequality and Personal Income Taxation. The Origins and Effects of Legislative Malapportionment”) we tackle the relationship between inequality and taxation. In particular, we attempt to answer the following question: Why does personal income taxation remain relatively low in many developing countries despite a period of democratic advancement and rapid economic growth? This stylized fact is hard to reconcile with standard political economy models of taxation that expect democratic regimes to bring about redistribution in countries that suffer from high inequality. In the paper we argue that the details of political institutions are key to understand this stylized fact.
What we find is that democratic regimes in countries with high income inequality have been unable to increase personal income taxation and redistribution in part because of bias in political representation. The introduction of such bias, also known as legislative malapportionment, increases the weight of districts associated with the elites and conservative forces in the electoral process –who prefer lower taxes and redistribution- giving them additional leverage in the policymaking process. As a result, they are better able to protect their interests and influence policy in their favor.
While the paper tests this hypothesis on a cross-sectional time-series analysis of more than 50 countries between 1990 and 2007, the Figure below presents our results by averaging taxes and political representation biases (malapportionment) at the regional level. Basically, the Figure shows that those regions in which biases tend to be larger, personal income taxes tend to be lower.
The bias is not exogenous. The study also found that economic disparities are a significant driver of political representation bias: the level of legislative malapportionment is significantly higher in countries characterized by historically more unequal distributions of wealth and income. Examples of manipulation of political institutions to protect elite economic interests abound in the developing world, particularly because institutional changes and democratic transitions tend to be more prevalent. For example, during the transition from apartheid to democracy in South Africa, political boundaries were drawn explicitly to assure minority representation at the state level, and given the federal nature of the Constitution, this provided a check on post-apartheid redistributive fiscal policies. In Latin America, the period just before the democratic transition was a key institutional moment in which outgoing elites attempted to manipulate political institutions and bias political representation in their favor across a number of countries. One salient example is perhaps that of Chile, where the electoral system has tended to over represent conservative districts –which had supported Pinochet in the referendum before democratization.
The design of political institutions to favor incumbents (or those in power at the moment of drafting institutions) was also present in today’s established democracies at different historical junctures when inequality was higher. For example, the Swedish 1866 Constitutional reform guaranteed that the first chamber would consist of the Swedish elite and voting would we weighted by wealth, a type of electoral system that was also favored by conservative politicians in the Prussian Chamber of Deputies during the late nineteenth and early XXth century. Similarly, in Australia the practice of allowing rural electoral divisions to be unequal in voter population from city divisions derived partly from a conservative view that rural outlooks could and should act to mitigate the radical capacity of the cities.
The results in the paper tend to point out some factors that are relevant for current debates. First, personal income taxes and redistribution tend to be lower in countries with high levels of inequality. Therefore, the problem doesn’t seem to be that the government is doing too much in favor of redistribution by increasing personal income taxes and generating the wrong incentives in the labor market but that economic policies tend to favor the status-quo. Of course, it could be that other taxes such as sales or corporate taxes may be generating enough distortions to have a negative effect on economic activity and consequently on employment. Second, when judging the results of the political process is important to take into account that not everybody weights the same at the negotiation table. By introducing a bias in political representation and weighing the interests of some groups more than proportionally in the policy process, can lead to outcomes that are not necessarily in line with the preferences of a majority of citizens in democratic regimes. Hence, it may lead to dissatisfaction, apathy, and some times to violent reactions.
This post summarizes the results in the paper: Ardanaz, M., and Carlos Scartascini. 2013. “Inequality and Personal Income Taxation: The Origins and Effects of Legislative Malapportionment”. Comparative Political Studies 46(12): 1636-1663. December
** Carlos Scartascini is a Principal Economist at the Research Department of the Inter-American Development Bank (IDB). The opinions expressed in the note are those of the author and do not necessarily reflect the views of the IDB, its Board of Directors, or the countries they represent. For more information on the author and his publications, see www.cscartascini.org