Meet the Oligarchs: Business Legitimacy, State Capacity and Taxation

by Rafael Di Tella, Juan Dubra, and Alejandro Lagomarsino

Overview — What role do people’s beliefs about the rich play in the determination of public policy? This study focuses on three policy domains: public-private sector meetings (assumed to be an important determinant of state capacity), demand for taxation of the top 1 percent, and business regulation. Results overall suggest that trust in business and government operate differently in people’s mind. While business legitimacy leads to a lower demand for regulation, this is not so clear-cut for trust in government.

Author Abstract

We analyze the role of people’s beliefs about the rich in the determination of public policy in the context of a randomized online survey experiment. A question we study is the desirability of government-private sector meetings, a variable we argue is connected to State capacity. Survey respondents primed with negative views about business leaders want fewer meetings as well as higher taxes for the top 1% and more regulation. We also study how these effects change when subjects are (additionally) primed with positive/negative views about government officials. Distrust in the government increases the preferred tax rate on the top 1% only when business legitimacy is low. A model with multiple equilibria helps interpret these findings. In one of the equilibria, meetings are allowed, business legitimacy is high, and people set a low income tax rate for businesspeople. In the other, meetings are forbidden, business legitimacy is low, and people set high taxes to punish the businesspeople for their corrupt behavior.