From Flat to Fair? The Effects of a Progressive Tax Reform

121 Pages Posted: 31 Jan 2025

See all articles by Nicolas Ajzenman

Nicolas Ajzenman

McGill University - Department of Economics; IZA Institute of Labor Economics

Guillermo Cruces

Universidad Nacional de La Plata - Centro de Estudios Distributivos, Laborales y Sociales (CEDLAS); IZA

Ricardo Perez-Truglia

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Dario Tortarolo

World Bank

Gonzalo Vazquez‐Bare

University of California, Santa Barbara (UCSB) - Department of Economics

Date Written: December 12, 2024

Abstract

This paper investigates the impact of a progressive tax reform on tax compliance. We leverage a major progressive tax reform in a large Argentine municipality. First, we use a quasi-experimental design to estimate the causal effect of changes in a household's own tax rates on its tax compliance. Second, we utilize a large-scale natural field experiment to examine whether, holding a household's own tax rates constant, tax compliance is influenced by the tax rates of poorer or richer households. We find that reducing taxes for poorer households increases their compliance, while increasing taxes for richer households decreases their compliance. When poor households learn about the tax hike on the rich, this increases their perceived fairness of the tax system and their tax compliance. When rich households learn about the tax cuts for the poor, their perceived fairness increases significantly, but their compliance, if anything, goes down. Leveraging another reform (and another field experiment) that took place a year later, we show that both the quasi-experimental and experimental findings replicate. Our evidence highlights that tax compliance depends not only on a household's own tax rate but also on its perception of the broader tax schedule. Our findings also highlight the gap between stated and revealed preferences for redistribution. Lastly, we conduct a counterfactual analysis to illustrate the implications of our findings for the design of tax policies.

Keywords: progressive taxation, fairness, property tax, tax morale

JEL Classification: H24, H26, H71, D31, C93

Suggested Citation

Ajzenman, Nicolás and Cruces, Guillermo and Perez-Truglia, Ricardo and Tortarolo, Dario and Vazquez‐Bare, Gonzalo, From Flat to Fair? The Effects of a Progressive Tax Reform (December 12, 2024). Available at SSRN: https://ssrn.com/abstract=5053909 or http://dx.doi.org/10.2139/ssrn.5053909

Nicolás Ajzenman

McGill University - Department of Economics ( email )

855 Sherbrooke Street West
Montreal, QC H3A 2T7
CANADA

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Guillermo Cruces

Universidad Nacional de La Plata - Centro de Estudios Distributivos, Laborales y Sociales (CEDLAS) ( email )

Centro de Estudios Distributivos, Laborales y
Sociales, Calle 6 e/47 y 48
La Plata, Provincia de Buenos Aires 1900
Argentina

HOME PAGE: http://cedlas.econo.unlp.edu.ar

IZA

P.O. Box 7240
Bonn, D-53072
Germany

Ricardo Perez-Truglia (Contact Author)

University of California, Los Angeles (UCLA) ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Dario Tortarolo

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Gonzalo Vazquez‐Bare

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

Santa Barbara, CA

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