IDB study links lower level of personal income taxes to political representation bias

Democratic regimes in countries with high income inequality have been unable to increase personal income taxation in part because of bias in political representation, according to a global study conducted by the Inter-American Development Bank (IDB).

The greater the bias —or the over-representation in the legislative system of districts that favor high-income groups— the smaller is the collection of personal income taxes as a share of the gross domestic product, according to the IDB Working Paper, “Why Don’t we Tax the Rich? Inequality, Legislative Malapportionment and Personal Income Taxation Around the World,” which analyzed data from 50 countries between 1990 and 2007.

While some might expect that the shift away from authoritarian regimes and toward representative democracies would have resulted in higher taxes on the elite, to pay for expanded social programs, that has not necessarily been the case. Legislative malapportionment increases the weight of districts that favor the wealthy in the electoral process, giving them additional leverage in policymaking. As a result, they are better able to protect their interests and influence tax policy in their favor.

“The link between personal income taxation and political representation is a global phenomenon,’’ said IDB economist Carlos Scartascini, one of the authors of the study. “Countries facing political hurdles to raise personal income taxes may have to increase collection of other types of taxes that can fall more heavily on low-income groups, a decision that can exacerbate inequality. However, that can be compensated with greater spending on programs that benefit the poor.”

The paper helps explain why the democratization of a number of countries in recent decades has not been accompanied by large increases in personal income tax collection, shedding light on how the way in which democratic institutions are constructed and operate can affect economic policy, in some cases limiting the success of countries in pursuing progressive taxation.

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 more unequal distributions of wealth and income.