Rebuilding the Social Compact: Urban Service Delivery and Property Taxes in Pakistan

• In Event: Property Taxation in Developing Countries

Abstract

The social compact between citizen and state – whereby a citizen pays taxes and receives public goods and services – is a critical link in the development process. However, in many countries, this compact is broken: citizens do not receive high quality services because resources are limited by low levels of tax revenue. In turn, the low quality of services leads to a low willingness to pay taxes, and a broader lack of trust in the state.

In this paper, we investigate whether strengthening the link between property taxes and services can increase citizens’ willingness to pay taxes, improve service delivery, and ultimately revitalize the social compact. We do this by testing three interventions in a large-scale, long-term randomized controlled trial implemented in close partnership with the provincial government of Punjab, Pakistan. In the first intervention (‘Voice’), tax collectors elicit citizen preferences for specific local services when property taxes are collected, based on the rationale that increasing citizen voice may enhance the perceived legitimacy of political decisions. In the second intervention (‘Local Allocation’), property tax revenue is earmarked for local services, based on the rationale that increasing local tax-benefit linkages and informing citizens of this link may increase willingness to pay taxes. The third intervention (‘Voice-based Local Allocation') combines the previous two interventions: tax collectors elicit citizen preferences and property tax revenue is earmarked accordingly. While the importance of citizen engagement and tax morale have been known in the literature (e.g., Luttmer and Singhal 2014), there have been few studies (e.g., Brockmeyer et al 2024, Carillo et al. 2021, Krause 2020) that have attempted to establish the causal effect of voice and service provision on tax compliance and on citizens’ engagement with the state.

We implemented the interventions in a large-scale randomized controlled trial in Lahore and Faisalabad, the two largest cities in Punjab, with a sample comprising over 100,000 taxpayers. The interventions were repeated across multiple cycles over 5 years to trace dynamics as citizens observed how their preferences are acted upon through the interventions. We conducted information campaigns to increase taxpayer awareness of preference elicitation and service delivery. We collected detailed administrative, survey, and qualitative data on tax payments, public goods and services, and attitudes towards the state throughout the study period.

The findings suggest the interventions led to positive, but small effects on tax payments and attitudes towards the state, despite successful elicitation of preferences and delivery of services in treated localities. Taxpayers are more likely to have positive views of government actors and are more likely to believe there is a link between taxes paid and services delivered. Taxpayers who did not make tax payments at baseline are also more likely to make property tax payments in the initial years of the intervention. Surprisingly, simply earmarking revenue and delivering services - `Local Allocation' intervention - resulted in larger impacts than combining service delivery with citizen voice - `Voice-based Local Allocation' intervention.

Author

• Mahvish Shaukat, World Bank Research Group