Alejandro Estefan (UCL)

Title: The fiscal burden of many carried by a few: Evidence from Mexico 

Abstract:  In developing countries, governments face not only informational barriers but also constraints to enforcement and revenue administration. In high evasion contexts where only "third best" solutions are available (see Kleven, Khan, and Kaul, 2016), improvements to tax revenues can be attained by increasing taxes. However, achieving sustainable improvements in tax revenues is not simply a matter of increasing taxes but also requires consideration of basic fairness principles pertaining to compliance, an aspect of utmost importance in high evasion contexts. In this paper, we use property-level administrative records from all residential properties along with all their property tax payments in Mexico City between 2010 and 2013 to study the effect of increases in tax rates on tax revenues and tax compliance. We exploit variation generated yearly by unexpected hikes in the tax rate, which were specific to a different property value band each year. Importantly, these hikes in the tax rate were determined centrally by the tax authority without any previous announcement to the public. We find that, even though higher tax rates result in higher tax revenues, they also lead to increases in compliance inequality. Specifically, we find that hikes in tax rates lead to unambiguous and sharp reductions in tax compliance and increases in taxpayer complaints. The improvement in tax revenues is explained by a worsening of the tax burden on the group of taxpayers that continue to pay their liabilities. We reconcile these findings using a simple conceptual framework and propose a sufficient statistics approach to draw welfare implications for a social planner that weights the utility of taxpayers, tax revenues, and compliance equality.