Understanding of citizens’ reluctance to pay taxes

An effective way of improving tax compliance could be to improve service delivery and raise awareness of how governments spend tax revenues

An effective way of improving tax compliance could be to improve service delivery and raise awareness of how governments spend tax revenues

“Where does my tax money go? Effects of perceived government spending on tax compliance”, Matias Giaccobasso, Brad C. Nathan, Ricardo Perez-Truglia and Alejandro Zentner. NBER Working Paper No. 29789 February 2022 JEL No. C93,H26,I22,Z13

Does citizens’ perception of how government spends tax revenues affect how willing they are to pay taxes? Proponents of the classic theory of benefit-based taxation have long argued that citizens’ willingness to pay taxes depends on the benefits that taxpayers expect in return for paying their taxes. According to this theory, people might be more willing to pay taxes if they believe the money will be spent in a way that will benefit them personally. On the other hand, if government spending isn’t likely to benefit them directly, taxpayers are likely to pay less in taxes. Therefore, taxes aimed solely at redistributing wealth may not be attractive to many taxpayers.

THE ESSENTIALS

In this research project, a team of four researchers surveyed well over 2,000 households in Dallas County, USA, to estimate how their willingness to pay property taxes changed with new information about how their tax dollars are being spent by the government.

There was significant misperception among households about how the taxes they paid were being spent by the government. The authors therefore state that one way to encourage people to pay taxes would be to make such information more accessible to citizens.

The study’s conclusions could hold lessons for countries like India, where there is a significant rate of tax evasion, as citizens feel they are not receiving adequate benefits from the government for the taxes they pay.

Ignorance of tax spending

In Where Does My Tax Money Go? Tax morale effects of perceived government spending,” a team of four researchers, including Matias Giaccobasso and Ricardo Perez-Truglia, studied well over 2,000 households in Dallas County, the second-largest county in the US state of Texas, to measure their willingness to pay for property Taxes change with new information about how their tax dollars are being spent by the government. According to the authors, initially there was significant misperception among households about how the taxes they paid were being spent by the government. For example, households underestimated by up to 13 percentage points on average the proportion of property taxes they paid that went to fund public education. Such miscalculations existed despite the fact that there was publicly available information about how the government spends the taxes it collects. In fact, almost half of the property taxes collected in Texas went to fund public education.

The researchers, who wanted to find out how sensitive households are to changes in government spending, decided to exploit this misperception of citizens. They informed households during tax filing season of the actual portion of property taxes going to public education. The researchers then tried to estimate how the new information would affect households’ willingness to pay taxes. To measure taxpayer willingness, they examined data on property tax appeals filed by the sample household population. It should be noted that an objection allows a household to potentially reduce the amount it pays to the government in taxes. On average, these tax filings are successful two out of three times, helping households save $579 in the first year. In 2021, an average Dallas County home was valued at $327,690 and should pay $6,370 in property taxes, which is an effective property tax rate of about 2%.

When households were informed that their government was spending more of their taxes on public education, their behavior changed significantly. The reaction to the new finding varied between households. Households with children enrolled in public schools were less likely to appeal property taxes. This seems natural as these households benefited personally from the taxes allocated to public education. On the other hand, households without children who were enrolled in public schools were more likely to object to property taxes once they found that a larger proportion of property taxes went to public education. However, whether or not the proportion of taxes spent on public education was in the county did not appear to affect households’ decisions to appeal.

Lack of access

The authors also suggest that one way to encourage people to pay taxes is to make information about how tax revenues are spent by government more accessible to citizens. They also recommend that the government should provide detailed information on the different purposes (such as health, education, roads, etc.) for which tax collections are earmarked. These steps, the authors believe, reduce the propensity to file tax lawsuits and increase the willingness to pay taxes.

The study’s conclusions could hold lessons for countries like India, where the government is actively pushing to get more citizens to pay their taxes.

This is because a significant portion of tax evasion in India may be due simply to citizens feeling that they are not receiving adequate benefits from the government for the taxes they have already paid.

So, an effective way to improve tax compliance could be to improve service delivery and make government more accountable.

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