Fiscal Capacity, Preferences over Taxation, and Distributional Consequences

• In Event: Experiments on Communities and State Capacity

Abstract

States vary tremendously in their ability to enforce tax policies and collect taxes from its citizens (Bird & Zolt 2008, Fjeldstadt & Moore 2008, Gordon & Li 2009). Even across OECD countries, some states raise revenues efficiently, while others suffer from high levels of tax evasion. Much of the existing research on preferences over taxation, however, assumes the state to be a capable enforcer of tax policies. The premise that policies are enforced efficiently and equally is a common assumption in theories about voters’ preferences over taxes and/or redistribution. Yet, it is unlikely that citizens are ignorant of and indifferent to the state's capacity to enforce tax laws. Similarly, elite choices about tax rates and their progressivity are likely contingent on the (unequal) enforcement of those laws.

In this paper, we ask how changes in taxpayers’ perceptions of the state’s fiscal capacity – and implied distributional consequences for enforcement – change preferences over taxation. Does lower tax capacity reduce overall demand for taxation? Moreover, are (poor) voters less likely to prefer high progressivity if they believe it is easy for the rich to evade taxes? If citizens do not believe that taxes are enforced equally across incomes, a potential response could be to prefer less progressive taxation in an effort to encourage higher voluntary compliance.
The influence of state capacity on citizen perceptions of distribution and, consequently their preferences and behavior has received relatively little attention in political science and economics. To address this gap in our understanding, we undertake a survey experiment in which we randomly encourage different perceptions of the state’s fiscal capacity. Subjects are given true information treatments about the state’s ability to enforce tax policies that either prime high- or low-capacity aspects of the state. In particular, some subjects are assigned to articles about tax fraud and evasion by wealthy taxpayers to prime low capacity environments while others are assigned articles with success stories about high rates of voluntary compliance and enforcement. Our key outcomes of interest are respondents’ preferences over tax rates and tax progressivity. The results of the experiment will allow us to learn about how capacity influences distributional expectations of enforcement, and, in turn, voter preferences. These results will have important implications for scholars and policy makers alike.

Authors

• Jessica Gottlieb, University of Houston

• Florian Hollenbach, Copenhagen Business School

• Thiago de Miranda Queiroz Moreira, Texas A&M University