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

This paper investigates the relationship between tax progressivity and 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 poor or rich households. We find that reducing taxes for poor households increases their compliance, while increasing taxes for rich households decreases theirs. When poor households learn about the tax hike on the rich, this increases their stated perceived fairness of the tax system and their actual tax compliance. When rich households learn about the tax cuts for the poor, their stated perceived fairness also increases significantly, but their compliance, if anything, goes down. Leveraging a further reform and an additional 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 how they truly feel about 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.