Discovering tax decentralization: does it impact marginal willingness to pay taxes?

Abstract

Decentralized fiscal decision-making should serve to enhance welfare. Thus, 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 tax decentralization that has unfolded in Spain over the last 25 years and where there are two alternative regional financing regimes, with substantial differences. Our results suggest that individuals have very limited awareness of the tier of government to which they pay either the personal income tax (PIT) or the value added tax (VAT), frequently assuming taxes to be centralized. This holds true in common regime regions but 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), individual’s marginal willingness to pay taxes of common regime residents has a positive shift in PIT, while there is no evidence for VAT. Tax mix matters.