03.02.2025 |
Research
A study by Matias Giaccobasso (VATT Institute of Economic Research), Brad C. Nathan (Rutgers University), Ricardo Perez-Truglia (UCLA), and Alejandro Zentner (UT, Dallas) investigates the role of individuals’ perceptions of how their tax dollars are allocated through a natural field experiment in Dallas County, Texas, focusing on the allocation of property taxes to public schools.
Governments rely on property taxes as a key source of funding for public services, including schools, roads, and public safety. However, taxpayers often have inaccurate perceptions of how their tax dollars are allocated, which can influence their willingness to comply with tax obligations. A study by Matias Giaccobasso (VATT Institute of Economic Research, FIT), Brad C. Nathan (Rutgers University), Ricardo Perez-Truglia (UCLA), and Alejandro Zentner (UT, Dallas) investigates the role of these perceptions through a natural field experiment in Dallas County, Texas, focusing on the allocation of property taxes to public schools.
Motivation and research question
Do individuals’ perceptions of how the government spends tax dollars influence their willingness to pay taxes? From an individual’s point of view, the taxes that a single person pays have a negligible impact on the quantity or quality of government services that the individual receives. In other words, one individual can free-ride on the taxes paid by all the other taxpayers. However, if individuals perceive that their taxes are being used to fund government services that are of personal benefit to them, they may feel a heightened moral obligation to pay their taxes. This reciprocal motivation channel may help explain why some individuals are more willing to pay taxes than others. This channel could also be relevant for policymakers, as government communications about public finances might influence tax morale.
Methods and research design
The experiment leverages the context of property taxes, which represent an important source of revenue for governments in the United States and around the world. About 80,000 letters were mailed to homeowners in Dallas County, Texas inviting them to participate in an online survey. The survey included an information-provision experiment to test how correcting taxpayers’ misperceptions about the share of property taxes funding schools (henceforth, school share) affects their likelihood of filing property tax appeals and other downstream outcome such as post-appeal assessed values. Changes in tax appeals are interpreted as changes in willingness to pay taxes, since households use the subjective nature of the appraisal process as an excuse to complain about their taxes being too high.
The experimental design compares households with and without children enrolled in public schools, hypothesizing that reciprocal motivations – where individuals feel a moral obligation to pay taxes if they perceive personal benefits from government services – drive tax compliance. The key intuition behind this comparison is that households with and without children benefit differently from the share of tax dollars allocated to the public school system.
Findings
The experiment yields three main findings. First, the researchers document widespread misperceptions about the school share, with most households underestimating the share of taxes funding schools. Second, when provided with accurate information, it is observed that households strongly update their beliefs. More specifically, about 80% of the original misperceptions are corrected by the information provision experiment.
Finally, households not only change their beliefs, but also adjust their behavior in a way that is consistent with the reciprocity mechanism: upon learning that a larger share of government expenditure is allocated to fund public schools, households with children (i.e., those who benefit the most from government spending in public schools) became less likely to file appeals, while those without children (i.e., those who benefit the least) became more likely to protest their tax assessments. When looking at downstream outcomes, it is observed that changes in protesting behavior are consequential in that they lead to successful protests and subsequently affect the assessed home values.
Policy implications
These results stress the challenges of public communication policies. First, the study observes that there are large misperceptions about government spending, even when such information is publicly available. For governments interested in educating their citizens on how tax dollars are spent, they should do more than post information on a website. Additionally, governments may want to simplify the connection between the taxes they collect and the government services they support. In the case of state and federal governments, tax dollars follow a complicated path from taxpayers’ pockets to the provision of public services. As a result, there is probably much more room for improvement in how the state and federal governments communicate with their taxpayers.
These findings also provide some hints for policymakers looking to improve tax compliance. The results underscore the challenges and limitations of transparency policies and information campaigns. For example, a message highlighting a government service (e.g., public schools) can boost tax compliance among individuals who benefit most from that service (e.g., households with children). However, it can reduce compliance from taxpayers who do not benefit from that service (e.g., households without children). As a result, these effects may cancel each other out, resulting in a null average effect on tax compliance. In some cases, this approach may even backfire. The findings suggest that governments may be able to use reciprocal motives to boost average tax compliance, but only if they are willing to target information (e.g., informing households with children about public school spending). Also, governments could try to persuade taxpayers that their tax dollars are spent efficiently or that their tax payments are not captured by corrupt politicians or wasted by bureaucrats. To the extent that these messages raise the average taxpayers’ perceptions that their tax dollars are well-spent, they also may lead to higher overall tax compliance.
The article Where Do My Tax Dollars Go? Tax Morale Effects of Perceived Government Spending has been accepted in American Economic Journal: Applied Economics. A working paper version is available as part of the FIT working paper series #28.