Is there Rent-Seeking in Brazilian Municipalities?

Responsible researcher: Adriano Valladão Pires Ribeiro

Article title: TESTING RENT-SEEKING IN BRAZIL: INEQUALITY AND IPTU COLLECTION IN BRAZILIAN MUNICIPALITIES

Article authors: Rodrigo Mahlmeister, Bruno Kawaoka Komatsu and Naercio Menezes Filho

Location of intervention: Brazil

Sample size: 9,456 observations

Major theme: Economic Policy and Governance

Type of Intervention: Relationship between inequality and revenue

Variable of main interest: IPTU collection (representing rent-seeking )

Assessment method: First differences method

Policy Problem

Rent -seeking, or capture by the elite, occurs when an institution tries to obtain additional gains without any compensation in terms of increased productivity. In the context of Brazilian cities, it can be understood as the portion of society with greater purchasing power trying to influence the public sector to direct public resources to expenses and collections in their interests. That is, reducing the collection of direct and regressive taxes, such as 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.

Assessment Context

The Urban Property and Territorial Tax (IPTU), due to its characteristics, can be used to investigate the existence of capture by the elite in Brazilian municipalities. The tax, on the one hand, is not very important for the municipality's revenue, on the other hand, it is decided entirely at the municipal level, making it more susceptible to elites. IPTU can also be seen as an instrument to reduce social inequalities, as it is levied directly on assets. Furthermore, social spending on health, sanitation, education and culture can also be used in research as they have private substitutes, that is, if there is capture by the elite, these expenditures would have a lower priority.

Intervention Details

From the discussion above, there would be a positive relationship between inequality and elite capture. In practical terms, the relationship between income inequality, measured by the Gini coefficient, and IPTU collection is sought. The data consists of information from Brazilian municipalities in 2000 and 2010 and some observations are relevant for the period.

First, it is noted that, for 2000 and 2010, the IPTU is, in fact, relatively small compared to the GDP per capita, in addition, the average spending on education, culture, health and sanitation grew, even though the pace of both recent ones has been more intense. A reduction in inequality was also observed, given a slight drop in the Gini index (from 0.62 to 0.60). On the other hand, both the correlation between IPTU collection per capita and the Gini index and the correlation between variations in IPTU collection and the Gini index are negative, indicating that greater inequality is associated with lower IPTU collection.

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 became non-existent in 2010. In other words, in 2000, greater inequality was associated with lower spending on education and culture, whereas in 2010 spending on 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 variation in the Gini index and variation in social spending point to both a positive association between increases in inequality and increases in spending on education and culture and for no association between variation in inequality and spending on health and sanitation.

Finally, it is worth analyzing the situation of the Gini index between these two years. The most unequal municipalities in 2000 were those that reduced inequality the most until 2010, however, a large part of the least unequal municipalities in 2000 increased inequality until 2010. Spending on education and culture had the same pattern, in which spending in municipalities that had the least disbursed in 2000 in these areas were those that grew the most. The same goes for spending on health and sanitation.

Methodology

The main objective is to measure whether an increase in inequality in municipalities between 2000 and 2010 is associated with a drop in IPTU collection. To this end, the first differences approach is used, which consists of taking the difference between the values ​​of observations from 2010 and 2000 with a view to eliminating 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 expenses.

Results

The result of the main investigation indicates that per capita IPTU collection and inequality have a negative relationship, that is, the greater the inequality, the lower the revenue would be. In numbers, a 1% increase in inequality would imply a 0.5% drop in IPTU collection per person. For spending on education and culture, the result points 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 null, inequality could be greater or lesser for any level of spending on health and sanitation.

Based on the results, the relationship between inequality and IPTU collection 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 shows that the negative relationship between IPTU collection and inequality occurs in the municipalities with the lowest average income in 2000, that is, the initially poorest municipalities. The positive association between inequality and spending on education and culture occurs in municipalities that were initially richer and where inequality was most reduced between 2000 and 2010. For the relationship between the Gini index and spending on health and sanitation, the result is indifferent regarding the average income level of the municipality.

Public Policy Lessons

As a lesson, the results suggest that capture by the elite possibly occurs in the poorest and most unequal municipalities, exactly those that need better mechanisms for distributing income and providing public services. In these municipalities, rent-seeking would reduce the collection of direct taxes on property, the IPTU, appropriating one of the ways to redistribute income locally.

Reference

Mahlmeister, Rodrigo; Komatsu, B.K.; Menezes Filho, N. “Testing Rent-Seeking in Brazil: Inequality and IPTU Collection in Brazilian Municipalities.” Policy Paper, vol. 32, 2018.