Principal investigator: Adriano Valladão Pires Ribeiro
Article title: Testing Rent-Seeking in Brazil: Inequality and Property Tax Collection in Brazilian Municipalities
Article authors: Rodrigo Mahlmeister, Bruno Kawaoka Komatsu and Naercio Menezes Filho
Location of the intervention: Brazil
Sample size: 9.456 observations
Main theme: Economic Policy and Governance
Type of Intervention: The relationship between inequality and tax revenue.
Primary variable of interest: Property tax collection (representing the rent seeking)
Evaluation method: First Differences Method
Policy Problem
O rent-seeking, Economic capture, or capture by the elite, occurs when an institution attempts to obtain additional gains without any corresponding increase in productivity. In the context of Brazilian cities, it can be understood as the segment of society with greater purchasing power attempting to influence the public sector to direct public resources towards spending and revenue collection in their interests. That is, by reducing the collection of direct and regressive taxes, such as property tax (IPTU), and/or directing social spending to other areas, such as infrastructure. Therefore, in these situations, redistributive policies would be blocked or minimized, which would maintain or increase economic inequality.
Evaluation Context
The Urban Property Tax (IPTU), due to its characteristics, can be used to investigate the existence of elite capture in Brazilian municipalities. On the one hand, the tax does not represent a significant portion of municipal revenue; on the other hand, it is decided entirely at the municipal level, thus making it more susceptible to elite control. The IPTU can also be seen as an instrument to reduce social inequalities, since it is levied directly on property. Furthermore, social spending on health, sanitation, education, and culture can also be used in the investigation because it has private substitutes; that is, if elite capture exists, these expenditures would have lower priority.
Intervention Details
Based on the discussion above, there would be a positive relationship between inequality and capture by the elite. In practical terms, the aim is to find the relationship between income inequality, measured by the Gini coefficient, and property tax revenue. The data consists of information from Brazilian municipalities in 2000 and 2010, and some observations are pertinent to the period.
First, it is noted that, for 2000 and 2010, property tax (IPTU) is, in fact, relatively small compared to GDP per capita. Furthermore, average spending on education, culture, health, and sanitation increased, although the rate of growth for the latter two was more intense. A reduction in inequality was also observed, given a slight decrease in the Gini index (from 0,62 to 0,60). On the other hand, both the correlation between per capita property tax revenue and the Gini index, and the correlation between variations in property tax revenue and the Gini index, are negative, indicating that greater inequality is associated with lower property tax revenue.
The same exercise can be done regarding the relationship between inequality and social spending on education, culture, health, and sanitation. The correlation was negative between inequality and spending on education and culture in 2000, but it ceases to exist in 2010. In other words, in 2000, greater inequality was associated with lower spending on education and culture, while in 2010 spending in these areas would be similar regardless of inequality. The Gini index correlates negatively with spending on health and sanitation in both 2000 and 2010. Furthermore, the correlations between changes in the Gini index and changes in social spending point both to a positive association between increased inequality and increased spending on education and culture, and to no association between changes in inequality and spending on health and sanitation.
Finally, it is worth analyzing the Gini index between these two years. The municipalities with the greatest inequality in 2000 were those that reduced inequality the most by 2010; however, a large portion of the municipalities with the least inequality in 2000 saw an increase in inequality by 2010. Spending on education and culture followed the same pattern, with the municipalities that spent the least in these areas in 2000 experiencing the greatest growth in spending. The same can be said for spending on health and sanitation.
Exclusive
The main objective is to measure whether an increase in inequality in municipalities between 2000 and 2010 is associated with a decrease in property tax (IPTU) revenue. To this end, the first differences approach is used, which consists of taking the difference between the values of the observations from 2010 and 2000, aiming to eliminate the specific effects of each city. That is, some specific characteristics of each city that influence the relationship between inequality and IPTU would be the same in both years; therefore, the difference in values would cancel out the effects related to these characteristics. Furthermore, using the same approach, the relationship between the variation in the Gini index and social spending on education, culture, health, and sanitation is also considered, since capture by the elite could also influence these expenditures.
Results
The main investigation results indicate that per capita property tax revenue and inequality have a negative relationship; that is, the greater the inequality, the lower the revenue. In numbers, a 1% increase in inequality would imply a 0,5% decrease in property tax revenue per person. For spending on education and culture, the results point to a positive relationship between inequality and expenditure in these areas; more unequal municipalities would spend more on education and culture. Finally, the relationship between the Gini index and spending on health and sanitation would be zero; inequality could be higher or lower for any level of spending on health and sanitation.
Based on the results, the relationship between inequality and property tax revenue suggests the presence of capture by the elite, but the relationship between the Gini index and social spending suggests the opposite. A deeper exploration of these results indicates that the negative relationship between property tax revenue and inequality occurs in municipalities with the lowest average income in 2000, that is, the initially poorest municipalities. Conversely, the positive association between inequality and spending on education and culture occurs in the initially wealthier municipalities where inequality decreased the most between 2000 and 2010. For the relationship between the Gini index and spending on health and sanitation, the result is indifferent to the average income level of the municipality.
Lessons in Public Policy
As a learning experience, the results suggest that capture by the elite possibly occurs in the poorest and most unequal municipalities, precisely those that need better mechanisms for income distribution and provision of public services. In these municipalities, the rent seeking This would reduce the collection of direct taxes on property, such as IPTU (property tax), thus appropriating one of the ways to redistribute income locally.
Reference
Mahlmeister, Rodrigo; Komatsu, BK; Menezes Filho, N. “Testing Rent-Seeking in Brazil: Inequality and Property Tax Collection in Brazilian Municipalities.” Policy Pap, v. 32, 2018.
