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Willing to Pay? Testing Institutionalist Theory with Experiments

Final Report Summary - WILLINGTOPAY (Willing to Pay? Testing Institutionalist Theory with Experiments)

Why are people in some countries apparently more willing to pay their taxes than in others? We might expect that high tax burdens and or high tax rates would cause people to be more likely to cheat on their taxes. We find that this is not the case. Instead, through a combination of laboratory experiments and historical analysis this ERC project demonstrates that peoples “Willingness to Pay,” is more directly connected to the quality of government and efficiency of public services than it is to the tax burden itself.

Our project specifically examines the question of whether there are cultural biases that explain why some countries have much higher tax evasion than others. Our research demonstrates that culture offers a poor explanation. By conducting experiments in five countries with over 3000 subjects and in 17 different laboratories we have been able to demonstrate quite clearly that people decisions are driven by the quality of that institutions than they are to some broad or vague cultural variables. In short, Italy has a very high levels of tax evasion not because Italians are more likely to cheat than, for example, Swedes. Instead, Italians are less willing to pay taxes than Swedes because the quality of institutions in Italy is substantially lower and less efficient than that in Sweden.

We were surprised to learn that in all of the countries studied in this project (Sweden, Italy, United States, Romania and Britain) it was the British subjects who were the most willing to cheat their colleagues in our experiments. How do we explain this surprising outcome? In our analysis the British citizens have become increasingly self oriented and skeptical of public solutions. This is probably not a broad cultural explanation, however. Instead, we believe that the nature of political leadership in Britain today has led to words and increase skepticism towards public institutions. British citizens are not inherently more willing to treat their neighbors than citizens in other countries, however they have grown increasingly skeptical of their own institutions and as a consequence, apparently, increasingly skeptical of each other as well.

Many people would have expected that Americans would be the most willing to treat each other given their highly individualistic culture. We did not find this to be true. Instead, Americans were among the most willing to contribute to the public good and/or unwilling to cheat on their taxes – – as long as their taxes went to others whom they felt were like themselves.

In general, we found that citizens in every country are more willing to contribute to a public good when they know the specific group to which this goodwill be distributed. When the monies that they pay in taxes are contributed to a public institution, for example the Social Security system, the national government, or a fire department, they are less willing to contribute than when the money is redistributed to the group itself.

The largest differences in behavior were found when we asked people in different countries to contribute to the specific public institutions. Here we found that Italians and Romanians were much less willing to pay than Swedes, British, and even American citizens.

Lastly, we explored whether people were willing to increase taxes on specific groups and/or reduced spending in specific categories in the United States. We found that most Americans preferred increasing taxes on the wealthy and corporations and would not increase taxes on the middle and lower classes. We found that their spending preferences match their political ideology fairly well. In other words Republicans and Trump supporters were willing to cut spending on public health programs, whereas Democrats and Clinton voters were more willing to cut spending on the military.