Preferred tax rates depend on the rates paid by the rich

• Published in: Journal of behavioral and experimental economics 2023-06, Vol.104, p.102025, Article 102025
• Main Authors: Campos-Vazquez, Raymundo M., Krozer, Alice, Ramírez-Álvarez, Aurora A.
• Format: Article
• Language: English
• Subjects: Inequality; Mexico; Perceptions; Rich; Taxation
• ISSN: 2214-8043; 2214-8051
• DOI: 10.1016/j.socec.2023.102025

•Survey experiment data shows that preferred tax rate depends on the rate paid by the rich•Preferred tax rate increases 19% when rich pay 60% of income in taxes instead of 30%•The effect is not statistically significant for other scenarios (50, 40, or 20%)•Increase is driven by people with high socioeconomic status and high government trust•Findings highlight the importance of social norms concerning the behavior of the rich Using survey experiment data, we investigate whether individuals in Mexico modify their stated preferred tax rate as a function of the rate paid by the rich. Our experimental treatment finds that participants increase their willingness to pay taxes by approximately 2.3 percentage points, or 19 percent, when informed that the rich will pay 60 percent of their income in taxes instead of 30 percent (control group). The effect is not statistically significant for other scenarios, in which the rich pay 50, 40, or 20 percent relative to the control group. As participants know that the current tax rate for the rich is 30 percent, the experiment can measure the willingness to pay more in taxes as a function of the proposed rate for the rich. Our results show that people expect a progressive system and are willing to pay more if the rich pay much more. Moreover, this increase in willingness to pay taxes is driven mainly by individuals with high socioeconomic status and individuals whose trust in the government is above the median. Our findings are in line with experiments using public goods games with inequality in endowments that highlight the importance of social norms concerning the behavior of the rich. However, they contradict the predictions of traditional economic and political science models in which an increase in taxes paid by the rich decreases the tax rates that others are willing to pay.