Discovering tax decentralization: Does it impact marginal willingness to pay taxes? [WP]

Abstract

Decentralized fiscal decision-making should serve to enhance welfare by promoting allocative efficiency gains and fostering greater political accountability. Within such an institutional framework, individuals are assumed to be willing to pay, at least, no less taxes than those they pay in a centralized system. We test this hypothesis by means of a survey experiment, leveraging the process of decentralization that has unfolded in Spain over the last 25 years. Our results suggest that individuals have very limited awareness of the tier of government to which they pay their taxes, frequently assuming the system to be centralized. This holds true even in regions where tax decentralization is maximum, as is the case of Spain’s foral communities. On ‘discovering decentralization’ (i.e., being informed that a tax is more decentralized than initially perceived), an individual’s marginal willingness to pay taxes undergoes only a minimal change, with the exception of that of personal income tax. These findings raise questions about the purported benefits of tax decentralization.