Understanding citizens’ reluctance to pay taxes Premium

An effective way to improve tax compliance could be to improve the provision of benefits and make people aware of how the government spends tax revenues

The government should offer detailed information on the various purposes (such as health, education, roads, etc) towards which tax collections will be earmarked. | Photo Credit: Getty Images

‘Where Do My Tax Dollars Go? Tax Morale Effects of Perceived Government Spending,” Matias Giaccobasso, Brad C. Nathan, Ricardo Perez-Truglia, and Alejandro Zentner. NBER Working Paper No. 29789 February 2022 JEL No. C93,H26,I22,Z13

Do perceptions that citizens hold about how the government spends tax revenues affect how willing they are to pay taxes? Proponents of the Classical theory of benefit-based taxation have long argued that the willingness among citizens to pay taxes depends on the benefits that taxpayers expect to receive in return for paying their taxes. According to this theory, people may be more willing to pay taxes if they believe that the money will be spent in a way that personally benefits them. If, on the other hand, government spending is not likely to directly benefit them, taxpayers are less likely to pay their taxes. So taxes that are purely aimed at redistribution of wealth may not appeal to a lot of taxpayers.

THE GIST

In this research project, a team of four researchers studied well over 2,000 households in Dallas County, USA, to gauge how their willingness to pay property taxes changes with new information on how their tax money is spent by the government.

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

The study’s conclusions may hold lessons for countries like India where there is a significant share of tax evasion due to the fact that citizens do not feel that they receive sufficient benefits from the government for the taxes that they pay.

Ignorant about tax spending

In “Where do my tax dollars go? Tax morale effects of perceived government spending,” a team of four researchers including Matias Giaccobasso and Ricardo Perez-Truglia study well over 2,000 households in Dallas County, the second largest county in the U.S. state of Texas, to gauge how their willingness to pay property taxes changes with new information on how their tax money is spent by the government. According to the authors, first of all, there were significant misperceptions among households about how the taxes that they paid were being spent by the government. For instance, households on average underestimated, by as much as 13 percentage points, the share of the property taxes that they paid which went towards funding public education. Such misperceptions existed despite the fact that there was publicly available information about how the government spends the taxes that it collected. In fact, almost half of the property tax that was collected in Texas was used to fund public education.

The researchers, who wanted to find out how sensitive households were to changes in government spending, decided to exploit this misperception among citizens. They informed the households during tax filing season about the actual share of property taxes that went into public education. The researchers then tried to gauge the effect that the new information had on the willingness of households to pay taxes. To measure taxpayers’ willingness, they looked into data on property tax appeals that were filed by the sample population of households. It should be noted that an appeal allows a household to potentially lower the amount that it pays as taxes to the government. On average, these tax appeals are successful two out of three times and help households save $579 in the first year. In 2021, an average house in Dallas County was estimated to be worth $327,690 and it was supposed to pay $6,370 in property taxes, which represents an effective property tax rate of around 2%.

Once households were informed that their government spent a larger share of their taxes towards funding public education, there was significant change in their behaviour. The response to the new finding varied across households. Households with children enrolled in public schools were less likely to appeal against property taxes. This seems natural as these households personally benefitted from the taxes allocated towards public education. On the other hand, households without children enrolled in public schools were more likely to appeal against property taxes once they found out that a larger share of property taxes was allocated towards public education. However, whether the share of taxes spent on public education was within the county or not did not seem to affect household decision to appeal.

Lack of access

The authors also note that one way to encourage people to pay taxes would be to make information about how tax revenues are being spent by the government more accessible to citizens. They also recommend that the government should offer detailed information on the various purposes (such as health, education, roads, etc) towards which tax collections will be earmarked. These steps, the authors believe, will reduce the tendency to appeal against taxes and increase willingness to pay taxes.

The study’s conclusions may hold lessons for countries like India where there is an active push by the government to get more citizens to pay their taxes.

This is because a significant share of tax evasion that happens in India may simply be due to the fact citizens do not feel that they receive sufficient benefits from the government for the taxes that they already pay.

So, an effective way to improve tax compliance could be to improve the provision of benefits and make the government more accountable.