Dan Banik and Gustavo Flores-MacÃas discuss elite engagement in contemporary state building in Latin America and how some countries were able to adopt elite taxes for public safety.
While many Latin American states have experienced severe public-safety crises in the context of fiscal duress, elite engagement in state building has taken place in some countries but not in others. Why is that the case?
In explaining the adoption of elite taxes for public safety, Gustavo Flores-MacÃas argues that the conventional crisis-centered explanations are insufficient. Whereas economic elites are generally reluctant to shoulder a greater tax burden, public-safety crises can soften this opposition – when they affect elites directly – and thereby open the door to negotiations with the government. However, the deterioration of public-safety conditions is not enough to elicit elite taxation. Rather, the resulting tax arrangement will depend on the strength of business–government linkages in the form of formal and informal collaboration mechanisms. When linkages are weak, elite taxation is likely to fail, if attempted at all. Stronger linkages will make elite taxation more likely.
Gustavo Flores-MacÃas is a Professor of Government and Public Policy and Associate Vice Provost for International Affairs at Cornell University. His latest book is Contemporary State Building: Elite Taxation and Public Safety in Latin America. Twitter @Gustavo_F_M
Â
Key highlightsÂ
Host:
Professor Dan Banik, University of Oslo, Twitter: @danbanik  @GlobalDevPod
https://in-pursuit-of-development.simplecast.com/
Banik              Welcome to the show Gustavo. It's wonderful to see you.
Â
Flores             Thank you for having me Dan. It's a pleasure to be here with you.
Â
Banik              Let's start by discussing something that one often reads in the literature, and that is that Latin American states are often termed to be middle of the road states. They don't risk collapse in the immediate future, but there are, many some would say, profound institutional weaknesses: You have a law enforcement service that exists on paper, you have police but they, sometimes or often some people say, underperform. The same can be said of tax authorities; there is a willingness to undertake tax reforms, but the rhetoric perhaps does not match the reality. What can you say about contemporary state building in Latin America? What do you think has really changed and what remains in your view as some form of unfinished business?
Â
Flores             I think that's a wonderful question and let me start by saying that I think Latin America has been characterised as the middle class of the world, and I think this applies in many respects to the strength of the state right. We can think of state capacity as a government’s ability to get things done, whether this means the ability to vaccinate their populations, or perhaps the ability to carry out economic policies. Certainly, it has to do with the type of bureaucracies, the quality of bureaucrats, the education, and all these things. But in terms of Latin America, certainly one would argue that it is not in that category of failed states or states that are really struggling to deliver the most basic services like collecting trash and so on. But it's also not in the category of government where clearly everything works, service delivery, health services and education, everything works very well, like maybe in parts of northern Europe or elsewhere. So contemporary state building in Latin America I think has so many dimensions because there are unfinished tasks across the board, and we can think of public safety as one of them, we can think of even the ability to collect tax revenue from the population, we can think of the ability to deliver health services, we can think of the ability to deliver education, public education. There are so many areas in which Latin American countries still have a lot of work to do and I think of what is important is that there is a lot of variation within the region as well, you can find some countries that are maybe better at doing one thing than another, you can think of maybe Brazil, a country that is very good at collecting taxes compared to most other countries in the region, but let's say it's not as good at spending it in public education, it spends a lot of money, but the outcomes are not all that good. You can have a place like Haiti where Haiti struggles to deliver some of the most basic services, maybe even trash collection or delivering the mail, clearly a lot of variation within the region, but for the most part I think it's safe to say that it's like a middle class trying to get to that next level of development and the ability to deliver better quality services. But also, there's no guarantee this will happen, a lot of countries are just struggling not to fall behind even more and trying to keep up with other parts of the world that are clearly making progress along these lines.
Â
Banik              This brings me to a concept that as I mentioned to you earlier, my colleague Benedicte Bull is interested in, the role of elites of different types in state building, which is also something that you focus on in your excellent book. Let's talk about the role of elites, economic elites in state building. In many parts of the world elites have played a very important positive role, you mentioned Western Europe, there has been considerable interest in elite support for the welfare state to pay your share of taxes, it could also be in relation to certain crises that lead to elites doing more than their fair share, or at least be willing to pay taxes and do other stuff. But in other parts of the world, and this is where Latin America becomes interesting, there is the projection, at least many would say that Latin America is one of inequality, you think about elites as in some super rich people you have all this popular media projection in films, etc. You have landowners, very rich people and then you have poor people and of course you have middle class etc. Before we talk about the positive or even the negative aspects or the contributions of economic elites and state building, Gustavo, I would like to understand how you understand the concept of economic elites in a Latin American context, who are these elites Gustavo I'd like to know.
Â
Flores             Absolutely, I'm glad you bring up the work of Benedicte Bull because she has really been influential to me and for the completion of this book. I think of these elites in the context of Latin America as those sectors of society that really control most of the economic resources. As you pointed out, Latin America is a fairly unequal part of the world, there's a lot of wealth inequality, and wealth is highly, highly, highly concentrated, this means that we are really speaking about the top 5% of the population in terms of wealth. A lot of the main companies in Latin America are dominated by a handful of families and they transfer wealth from one generation to the next and they sit on the boards of these companies, and it's not to say that every company is like that, a lot of multinationals have changed some of that and have both modernised and internationalised ownership in Latin America. But what we are really thinking about, if we think of the top 5% of the wealthiest people in the region that ultimately have the power and the resources to try to circumvent tax obligations, and this is something that is not only true about Latin America this happens everywhere in the world, people hate paying taxes. I think a lot of people understand the need to pay taxes from a from a societal point of view to make things work, but when you have this middle-class type of country in Latin America and again middle-class and thinking about the world and it's a place in which things sort of work, but they don't work really well and a lot of these elites are thinking well why should I contribute more if government services don't really work for me, they sort of work, but not all that well. So, these are people that are thinking about what they are contributing to society in taxes they often contribute a lot in taxes in spite of the rhetoric and the sort of the animosity toward economic elites. Just to give you a sense, in many parts of Latin America only about somewhere between 5 and 10% of the population pays income taxes, and the rest tends to be just indirect taxes, value added taxes or sales taxes, consumption taxes, but those who do pay income taxes it's often these elites and the companies that they own. So those are the people I have in mind and the reason why I think they're important in this story is because they have both the wealth that often governments need to improve those services they provide from public safety to education, but also they have the ability to circumvent these obligations, they can not only hire accountants, lobbyists and lawyers to try to figure out how to pay less in taxes, they often have the ability to talk to those in positions of power directly, often they are good friends or even relatives who might be running the show in office at any given time. They are also the ones that have the ability to maybe take their money elsewhere, take it out of the country and shelter the money in other parts of the world, maybe where tax obligations might be lower. So that's a long way of saying, these are the people that play an important role in this tax bill in this state building story today and they are the ones that are very reluctant to contribute more but given the right circumstances can be compelled to do so.
Â
Banik              I think the relationship between economic and political elites is interesting because sometimes they may be the same group of people. You could have economic power and political power and vice versa. If you can get politicians to enact certain legislation that prevents you from giving more money to the state purse that is your main goal I suppose if you're an economic elite. I see in your work that there are not always negative aspects, elites have actually contributed in many parts of Latin America, contributed in a positive way to state building, I'm thinking about Colombia, El Salvador in Guatemala, in the post conflict period. They also have played an important role in Mexico, economic elites were crucial in the construction of the post-revolutionary state, even though the jury is still out, and many disagreements exists in terms of their contribution to stabilising development in the 1950s and 1960s. So, there is that positive contribution and yet as I understand it, Gustavo, in the Latin American context a lot of scholars tend to argue that it is really difficult as you just mentioned to engage elites in state building projects compared to elites in other parts of the world and this is even more difficult when certain big crises such as wars take place which I find quite fascinating. The literature as I see it on state building in Latin America tends to say that elites are a big obstacle, they actually prevent state building, they don't facilitate it, they are not conducive to state building, why do you think that is the case in Latin America?
Â
Flores             It's important to point out that it’s not that elites participate in a stable living project out of goodwill, I don't think it's a moral imperative that they feel or a duty to contribute to society.
Â
Banik              It’s just selfish interest.
Â
Flores             Well, yes, at the end of the day they have to see value in engaging in the state building project, especially because often this project will mean concentrated costs for elites and diffuse benefits that may or may not accrue, and if they do accrue, they accrue to society. I think it's also important to point out that one may agree or disagree with an elite’s project. After the Mexican Revolution, one could agree or disagree with the project that ended up winning in the end sort of this this constitutionalist project but at the end of the day, without elites in the mix, I think it would have been hard to move that project forward. This is true in Mexico after the revolution, but also in Central America after the civil wars in the 1980s and 90’s and elsewhere. So, elites are necessary, and the question is, what type of project would emerge? And sometimes we really don't agree with those projects, sometimes they're very self-serving. In the contemporary period and the period that the book focuses on, the last 20 years, 30 years, there's a real opportunity of state building with public safety crises. This also does not mean that elites all of a sudden say there's this crisis of public safety, let me help out, let me become involved. There's so much reluctance, so much animosity, and I think part of it has to do with the mistrust toward governments, mistrust that the additional revenue from taxes that elites would contribute would actually go towards the intended purpose. There's a lot of corruption, there's a lot of waste, and economic elites are certainly mindful of that, even if they themselves might engage in corrupt practises. I think at the end of the day governments have to make it clear that elites’ interests will be advanced when elites are engaged in this state building project. I don't mean this in a sinister way, certainly one could agree or disagree with the fact that elites’ interest should become a priority or not. But what is interesting in the context of public safety and crises of violent crime is that this tends to affect everyone, it doesn't matter how wealthy you are, violent crime affects your everyday life, and this is certainly true for people who are not elites, but elites have nowhere to hide in a way. This is something that makes public safety different from other types of public goods that the government may not be providing satisfactorily, so if I'm an elite and I am not in love with the public education system, chances are I can send my kids to a private school. If I am a wealthy person and I do not want to rely on the public hospital I can either go to a private hospital, or I can even maybe fly to Miami or somewhere else and get that type of private care. But with public safety, there's a limit to that, I can certainly hire bodyguards, I can live in a gated community, I can drive an armoured vehicle, but at the end of the day I will live in fear of victimisation day in and day out. This will affect not only myself, my family, psychological, physical well-being but also my bottom line, my firms, my companies and so on. These are important points to consider in that elites are crucial to the state building enterprise, they are a group that needs to be convinced that it's important to invest in this goal and the crisis of public safety or violent crime might present a window of opportunity to get them engaged.
Â
Banik              Much of what you say Gustavo applies to elites I would argue in Africa, in Asia, many would launch or come up with similar arguments, why should I pay taxes when I know the government is corrupt or is incompetent, it'll lead to more wastage, there's no point in me contributing. So, what I do as an elite, I would try to build a wall around myself, I can try and protect my family, my close relatives, and as you said, I could buy myself better health care, better education, I can bypass the government. But basically, it seems to me in many parts of the world, elites tend to erect these walls, and this reminds me of the time I was in Mexico City what a beautiful city and some of the most fashionable neighbourhoods, but you could never really see the houses because there were these huge walls, these fences and it’s the same thing in Cape Town or Johannesburg. But I want to talk to you first about taxation before we talk about public safety. In the book you have a fascinating quote by a former Minister of Finance from Guatemala, who was lamenting about the failure of tax reform, which is the taxation policy, he said, it is well known that in practise Guatemalan companies keep three books, one that they show to the tax authorities where profits are low, losses are low, so you're basically making sure you don't attract undue attention, and then you pay low taxes. Then you can also have another book where you actually want to get a loan from the bank and there of course, the profits are very high. But the true accounts, which is the third one they are secret. I think that itself is very illustrative of some of the challenges of implementing tax policy, but as I understand it, Gustavo, the legislative coalitions that one needs for economic reform they've emerged in very politically diverse and hotly debated political environments and yet tax reforms or tax policy itself is often very contested and understudied. What, then are the main determinants of fiscal reforms and elite taxation?
Â
Flores             Maybe we can start with the role of crises. I think crises are opportunities because they compel elites and really everyone to do things that maybe in regular times they would be very reluctant to do. We can think of differences, let's think about the case of Ukraine and the Russian invasion, I'm not an expert on Ukraine by any means, but I'm guessing that there were political differences that were very salient before the war between different factions inside Ukraine that were absolutely set aside the minute that you had this invasion. I'm not saying that they completely disappear they may be dormant for some time, but at least they become secondary and the imperative of resolving the crisis becomes front of mind for everyone. I think the same thing might happen with other forms of crisis even, say natural disasters, or a crisis of public safety or a pandemic, a COVID emergency. These differences don't disappear, I think the COVID pandemic is a good example in which things can become fairly politicised very quickly and disagreements do not go away but at least these barriers that exist in society become less prevalent and less meaningful to prevent society from moving toward a common goal. I think this is something that is happening in Latin America that helps governments collect more in taxes. Latin America is a region that collects very little in taxes compared to other parts of the world if we adjust for its level of development, when we say this particular level of development, this is the expectation that we would have that a country in that level of development would collect in taxes, Latin America tends to fall short by quite a bit, and most countries collect much less than is expected. The exception is perhaps Brazil that tends to be right on the expected level, but not higher. There are different explanations for this, some people point to the high levels of inequality not helping this tax collection because people say, well, only the rich should pay taxes. So, there are these factors of inequality that affect what is called tax morale, sort of this willingness to pay taxes, if I live in a very unequal society and I'm poor, I say, well the rich should pay. But the rich also say look, we are already paying most of the taxes, others should pay as well. So, in Latin America, tax collection has always been an issue, and these crises historically what they have done is that they might bring down some of the barriers, again, we can think of wars, we can think of natural disasters, and in this case crises of violent crime. It doesn't mean that governments will be able to convince people easily, but it does mean that governments might have a better chance, at least a fighting chance at getting people to pay more in taxes. With the examples that we discussed, it's not that elites will say OK I am going to pay exactly what I am supposed to pay in taxes, I think even when they're convinced to pay more, there's still a lot that is underpaid. The example you were giving the Minister of Finance in Guatemala is a good one, at the end of the day, even ifwe sit down at the table with governments to pay more and contribute toward this state building enterprise, there is still a lot that is unreported, there is still a lot of that is moved to offshore instruments that I can use to evade taxes, but it's better than the alternative, which is even less flowing into government.
Â
Banik              In many parts of the world, the big problems with taxation can be many, many factors. One could be a low tax base the economy is largely informal in some parts of the world. We are talking about certain countries in southern Africa, a country that I study quite a lot is Malawi, the economy is small and there is an informal sector, the government doesn't really know who to tax, which I expect not to be a problem in Latin America given bureaucratic capacity is, I would imagine, just a bit like in India, administrative capacity is quite strong. In that sense there may be other factors that prevent more successful tax policy. The other aspect actually has to do with crises, as I see it, it has to be visible, it has to feel personal for me to actually make a contribution. Now if I do support as an economic elite and I find that there is a political elite in power that I can identify with, I may feel, irrespective of a crisis such as a war, I may feel that there is finally somebody in power that I can trust and thereby there may be an emerging political settlement that elites agree upon saying, come on, let's all do our part because we finally have somebody in power that we know can deliver the goods.
Â
Flores             I think there's a lot of truth in what you have said in that elites and I think everyone in society tends to trust more those that are like themselves when they are in power. This is for example the importance of having different groups represented in Parliament or in office, in the executive because this representation is important, and these people will then better understand the needs of those groups in society. In the case of elites, it's an interesting situation in Latin America because as in other parts in the developing world there can be a lot of state captured by elites, it's not that elites tend to be underrepresented in government and you were alluding to this early on, that their own family members are in power or they themselves are in power. It would be hard to say that they're not represented they often, through campaign contributions can finance political parties that squarely represent them in in Congress, for instance. So, what is paradoxical here is that in spite of that representation, and in spite of that at times capture of governments and executives there is still this important mistrust because of the systemic corruption that is so widespread that then elites are not quite sure that what they're putting into the system is going to come back and benefit them. That is one of the main challenges of state building in today's world, at least in the developing world and that is finding ways to convince elites that is worth becoming involved in, but also ways that at the end of the day, tie government hands so that they really pay attention to where the money is going so there is less corruption. That money is not embezzled and at the end of the day better policy outcomes that might benefit certainly elites, but other groups in society, and again, public safety is one, in which fortunately you are not only benefiting elites when you're providing better public safety, you are benefiting most groups if not all.
Â
Banik              This brings me to the heart of the main argument in your book, which is really trying to distinguish different types of public good provision such as health care and education that may not attract elite interest, but public safety is so in your face that you really have no other option but to react and this is based on the fact that Latin America is one of the most violent regions of the world and homicide rates have increased dramatically in the 21st century. I think you have some figures in the book, about 300 homicides per day, even though this is from, 5,6,7 years ago, 110,000 per year more than 1.5 million between 2000 and 2015, so the public safety situation is grim. But for the purposes of engaging elites in the state building enterprise in order to give more money, extract more money from elites in terms of tax for state building, how do you, in your analysis Gustavo, differentiate public safety from these other forms of welfare good provisions such as education and health? As you just said maybe something about public safety means it benefits everyone, including elites, whereas health and education I suppose elites can bypass and find another way out, is that the reason that they feel like this is something that there's no way out of? You can have a lot of private security guards and stay in a gated community, but you still have to venture out of your secure neighbourhood.Â
Â
Flores             Exactly, I think it really has to do with the extent to which people can substitute these goods privately in the private marketplace and elites might still complain about private schools that they might not be thrilled with them, but they can still shape those schools, they can influence the curriculum. In Latin America historically, a lot of the Catholic schools were a response to this sense that the public school system was either not of enough quality or that they were teaching these sorts of Marxist revolutionary ideas to kids, and then the elites didn't want to have that as part of the curriculum, so they would just create their own schools and this is true at all levels. In Mexico, for example, the Tecnologico de Monterrey which is one of the main private universities today, is sort of an Institute of Technology of sorts in Mexico and it emerged out of business groups’ sense that the public educational system was not training the people that they needed for their companies. So again, it can be for ideological reasons, it can be for religious reasons, it can be for a number of reasons, but at the end of the day elites can provide these goods and substitute for these public goods in the private marketplace, but with public safety, there's a limit to that. This is something that came up time after time in interviews with elites in different countries, they could still invest their money elsewhere, they could still maybe move some of their relatives elsewhere, some of them to Miami, some of them to California. But there's really a limit to that and there are a lot of things that are sometimes cultural, sometimes social that root elites in their countries. At the end of the day, even for the wealthiest people in Latin America, it's not that easy to say look, I'm just going to leave this country for good and that's it, in part because their businesses are there, in part because that's their culture, and their family is there. It's not that easy even for elites to just pick up and leave for good, so this ability to substitute some goods but not others this difference is really, I think, at the heart of why elites are willing to sit down with governments and say OK, let's work towards solving this problem, but under certain conditions. So, governments and elites have to agree on the right conditions that need to be on the table, and these are different depending on the country. But what you were saying earlier is so important and that is that elites have to feel directly threatened by this, it's not enough for public safety to be bad in the country overall, if elites live, let's say in a safe part of the country, well, then this public safety problem is someone else's problem, not elites.
Â
Banik              The security threats facing not just Latin America, but also other parts of the world are so varied, you could have political protests, political movements, social movements, revolutionary movements. In Colombia you have had the FARC rebels, you have ongoing movements that last for decades, the state is seen to be failing perhaps, or making only small inroads. Then you have drug cartel, which reminds me of Narcos, the Netflix series, that is my impression, some of the drug cartels are based on Narcos and Narcos Mexico, by the way, which I thought was even better than the original Narcos. I'm told by some of my colleagues in Latin America, some of the depictions are pretty real, and they're not as exaggerated as we would think they are. So, here we have a state grappling not just with regular crime, but a whole series of threats and elites also understand these threats as something that the state may or may not have the capacity to do something about. Here I found a puzzle in your book, I'm trying to sort of understand this, if I'm an elite and I think the state has failed in education, in health, stuff that they should be able to do, why would I trust the state to do something about security? Even though a public threat of that kind affects me directly, it does not fundamentally I would argue change my perception of the state, I would still believe that they are incompetent. So, what is it about public safety that motivates, that catalyses the action that health and education do not?
Â
Flores             In different parts of Latin America the public safety situation got so bad for elites that they couldn't even travel from one city to another for family reasons or for business reasons for whatever. In the case of Colombia in the early 2000s, I think is a good example in which just the number of kidnappings taking place targeting economic elites was fairly significant. Not only was it dangerous to fly by plane, it was dangerous to go by car by bus, all modes of transportation presented at risk. When it gets to that point of the risk of being kidnapped or killed, really it is a nontrivial risk. I think elites are at least willing to give this a try, but again, I don't mean that this is every elite. I think the examples in Latin America suggest that even under the worst circumstances there will be groups that say I do not trust the government, I will not get involved, this is just, not for me, I would rather chance it privately and try to fix the problem myself. But there are other groups that at least are willing to give the government the benefit of the doubt, and there's also a sense that the private sector can do what the government is unable to do. In Mexico, for example, there's an important business elite in the northern city of Monterrey, close to the border with the United States and it's interesting that they really think the problem with public safety is that the government is in charge of it and the government is just not that competent and not that able to do this, so we're going to fix that we're going to finance this almost parallel security force.
Â
Banik              Like a militia, a private militia?
Â
Flores             Yeah, I mean in this case you know it was a state force it was not operating a style outside of what the state was sanctioning, but they were working with the state. They said, let us do the recruiting because you're not able, you're incompetent, we will put all of our human resource personnel from all of our companies to do this for you, and we're going to make sure that these police that we're recruiting are well paid because you are not paying them enough. All of these challenges that they've identified, they say, we'll take care of this, and you are still in charge of this, but we want to be so involved that we're going to run this. That same mentality permeates all of these cases in Latin America, in which governments and elites were able to reach an agreement and not everybody went along but at least they got to a point where they said look, we want this to be an experiment so let's make it temporary, if you are going to adopt the tax on the wealthiest sectors, we want it to be a temporary tax, so let's put a sunset on this tax for two years or three years or four years, and then if it doesn't work, it doesn't work, that taxes appear we're not going to pay it, so that's one. Another important condition for elites was that taxes be earmarked for public safety; this was crucial for them because they didn't want just the revenue to go anywhere. Now this is tricky because at the end of the day tax revenue can be fungible, even if I'm earmarking it for public safety, then maybe revenue that I would have used from the general fund for public safety I can use for something else and at the end of the day there was no additional revenue going into public safety. But this is why there was a third condition that was also important to elites and that was the ability to have real oversight mechanisms, often involving elites themselves and members of civil society more generally to oversee how the money was spent. In other words, to make sure that this money was going where it was meant to. So, if you put these things together, the short time horizon of attacks that earmarking this promise that it would go to something that was important to elites and the ability to oversee directly how that money was spent. This convinced at least important sectors of the elite, to say OK, let's give this a try and politically, the advantage of these types of taxes on the wealthy is that they're politically very desirable, or they're not problematic because the general population tends to like the incidence.
Â
Banik              Nobody can be against this idea, everybody wants security. I notice that there's an enormous variation as you've also just mentioned in the adoption of these security taxes in Latin America, and I found three or four categories of conclusions that you arrive at. One is of course the cases where security taxes on elites were adopted at various levels, and we're talking about Colombia, Costa Rica, Honduras, and also some parts of Mexico I think at the local level. Then there were cases where taxes were first defeated politically in the legislature, but subsequently approved as in El Salvador and then in Guatemala it was discussed but later abandoned, and in the rest of the region it wasn't discussed at all. So, tell us a bit about these variations, what explained the fact that in Colombia, Costa Rica, Honduras and parts of Mexico, the security taxes were actually adopted, whereas it was less successful elsewhere.
Â
Flores             Thank you for that question. The first step is whether this window of opportunity presents. So the first step in the sequence, and there are certainly countries in Latin America that it would be hard to say that they're going through this major crisis of public safety and even in places like, say, Brazil, Brazil's homicide rate per 100,000 people is of about 23-24, which puts it sort of middle of the road for Latin America, and even in a place like Brazil this figure, a 24 homicides per 100,000 people masks a lot of variation inside Brazil. Paces like Sao Paulo or Rio where a lot of the elites, the economic elites live, violent crime may be high, but it is declining or has been gradually declining over time and there is no real sense that things are getting worse, and we need to do something. But in other parts of Latin America, certainly in places like Colombia or El Salvador or Mexico, the sense is the opposite, that things are already pretty bad and deteriorating, and that we need to do something, so that's kind of the first thing, is there a public safety crisis? Yes or no, and what constitutes a real crisis many people disagree, but in places like Colombia in which it was just so difficult to travel from one city to the next in which kidnappings were really something that happened all the time, it was very clear that people, at least elites understood that as an untenable situation. So that's the first step. The second is, are elites willing to give this a try, and to do so they need to overcome this huge mistrust that exists toward the government. How might they be able to do that? Well, if a government just says look elites, I'm going to tax you more because we have this problem elites are still going to say look tax someone else, we already pay a lot in taxes and stop bothering us. So really what it takes is a government that establishes these real linkages with elites and, at least in the cases in Latin America that I study, the governments that are better able to do this are governments that come from the right of centre of the political spectrum and this is somewhat counter intuitive I think because people tend to associate the left of the political spectrum as being first of all, more willing and second, because of that willingness, they're better able to extract taxes from society. But at least in this particular type of taxation that focuses on elites, elites are somewhat more willing to go along when they think that the government will really keep their interests in mind and for those the perception is that the right of centre governments will do that. Then the third step is if I feel as an elite that the right of centre government understands my needs, what conditions or what constraints are we going to put in place so that the government actually follows through? Because I've been so jaded, I don't trust that this is going to happen just on someone’s word, and these are the important features of the institutional design of the tax that need to be put in place to convince elites that this is going to happen. Now something interesting is that once this happens, these taxes tend to be fairly sticky, they rarely disappear once these taxes are adopted, this short-term promise is an illusion, but at least for now I will just say that typically right of centre governments are the ones that are better able to convince elites that their interests will be protected and that it is worth contributing with more taxes.
Â
Banik              I'm reminded of my visit to Rio several years ago I was giving talks at the Federal University in Rio and also the Catholic University, and I was talking to some of my colleagues but also, some of these elites that I was hanging out with and one of the first things I noticed, Gustavo, is that unlike in other countries that I've studied or visited there was far less ostentation in Brazil. Elites had a very explicit strategy of not driving flashy cars, toning down their attire, it was all about not attracting undue attention, precisely because you didn't want to be a victim of a carjacking incident, or something like that. I thought that was pretty interesting how elites also adapt, unlike in some parts of the world where ostentation is an important part of being the big man, the big man syndrome, being able to distribute, to showcase your wealth in some parts of the world at least, maybe I'm generalising in Brazil, and Rio I found that they were doing the opposite. But I'm reminded also of El Salvador in your book, because El Salvador has one of the highest levels of violent crime in the region. What is quite fascinating, the story that you paint is that the first left of centre government failed to adopt elite taxes, and it wasn't until this government formed a coalition with as you just said, the right of centre parties and businesses were directly linked to this, that there was an increased tax burden on the wealthy. Can you say a little bit about the El Salvador case?
Â
Flores             The case of El Salvador is really helpful to illustrate a few important points. I think one is that in spite of this major crisis of public safety, at least we are still unwilling to become engaged to try to become part of that solution when the government was a left of centre government. Let's say the Funes administration, President Funes had been a leftist administration, the party in office was from the Farbundo Marti National Liberation Front, the air of the leftist guerrilla from the Salvadoran Civil war was a lot of mistrust. Now maybe not every leftist government in the region emerged out of a left-wing guerrilla movement but I think other experiences suggest that the mistrust is real. In this particular case I found it very interesting how elites said I don't care how bad things are I do not trust my money, I will not give it to this government because I will only lose my money and conditions will not improve. Some elites were concerned that this money would go to other priorities, perhaps education, health, care, whatever, but they said those, I think they're very important, but don't get me wrong, this is not what we need right now. Others just thought that the government wasn't serious about this need to address crime so for different reasons they mistrusted this government to the point that they rather continue in this situation of extremely high violent crime than work with the government to try to address the problem. It wasn't as you said, until the government then formed a legislative coalition with right of centre parties that business people said, OK, let's give this a try. Even then the reception was not as positive as it was in other countries like say Colombia, in which it was clearly a right of centre government, because then elites still negotiated down some of these taxes in a way that the incidence of the tax would not only fall on elites, but also fall on other sectors of society let's say middle classes and so on. What I think that the Latin America experience tells us is that even in situations with extreme violence, that is not enough, and that whenever governments are unable to convince elites that they have their own interests in mind, what we see is some version of attacks, but not necessarily as directly affecting elites as we see in other countries where the commitment is real.
Â
Banik             If you think about crises, not just wars, but also crises such as pandemics that we have all recently experienced, you would think that that kind of crisis would also lead to major changes in how governments go about their business, but also how citizens trust or do not trust, or the kind of aspirations that citizens have of their governments to meet future crises. I'm thinking about some of those viral photos, videos from Ecuador, remember, in the initial stages of the pandemic, how the health system collapsed, I had been to Quito a few years ago, I was so impressed with everything and suddenly to see this total collapse, really shocking. Just like public safety, Gustavo, I would imagine when elites are exposed to that kind of a crisis, they can't, because of quarantine travel to Miami they are stuck there, there should be given this kind of reasoning in this argument that we've been following in this conversation, there would be adequate reason for them to think, oh, this is a good reason for me to invest in health care. The primary health care situation in this country should be strengthened, maybe also for education. My final question to you is how can we use some of these lessons that you very aptly show in your book about public safety fuelling this interest in some countries to provide a security tax, how could this be mobilised for other areas of action, such as health care, such as education, such as anything related to development and welfare of people on the continent?
Â
Flores            I do have some thoughts. I think the experiences that I study in the book highlight the importance of thinking about different paths that become self-sustaining or self-reinforcing equilibrium and they can be vicious cycles or virtuous cycles and there's a strong relationship between the quality of the public good provided and people's willingness to pay taxes. What we see here is that when people see that the government is both making a good effort but also delivering to some extent on that public good people are a lot more willing to become involved, to contribute to pay more taxes, to give governments the benefit of the doubt. These types of virtuous cycles are the ones that need to be generated regardless of the public good. It might be, as we said, a bit harder to engage elites in becoming involved in other public good provisions, but they still can become involved, it's not that they don't care about public health, it's not that they don't care about education, and even from a very personal self-interested way elites have a stake in society being better educated inside it, being generally healthy. If governments are not providing these quality public goods, people become disenchanted, people become less willing to pay taxes toward that effort. I think this shows that not only delivering on the promise of the public goods is really important, and we see this in parts of the world, let's say Norway or northern Europe, I think there's a greater sense that the taxes that one pays actually are at work, one sees concrete evidence of where that money is going. In Latin America, there's an important disconnect between the money that one pays into the system, and the outcomes that one observes to the extent that governments can bring those together, close that gap that exists, I think that'll go a long way to generating these virtuous cycles. One of the ways that I think is a relatively low hanging fruit is to rely on earmarking for certain public goods that might be of high importance so that people actually make that connection. There's quite a bit of research now that points to this important connection that people will make not only when it comes to taxation, philanthropy and different realms in which people will feel a lot more compelled to contribute, if they know that money is going to something that they care about. Politically, that also helps in making these reforms possible for the same reason, people feel that this is going to something that they care about. Economists tend not to like earmarking because it can create inefficiencies in the tax system, certainly with an eye toward those considerations but politically in countries that have struggled with tax collection and the delivery of quality public goods as a result. I think this can be a relatively feasible and low hanging fruit type of avenue that they can pursue to try to harness these experiences from public safety and get them to work in other types of goods as well.
Â
Banik             It was great fun chatting with you today, Gustavo. Thank you so much for coming on my programme.
Â
Flores             Thank you Dan for the opportunity to be here. I really enjoyed our conversation, and I certainly appreciate all of your questions and thoughtful comments.
Â