Understanding Citizens’ Reluctance to Pay Taxes

ECONOMY/ GOVERNANCE

• GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
• GS-3: Indian Economy & its challenges

Understanding Citizens’ Reluctance to Pay Taxes

The perception on how government spends its money impacts citizen’s behaviour in regard to paying taxes

• Proponents of the Classical theory of benefit-based taxation have long argued that the willingness among citizens to pay taxes depends on the benefits that taxpayers expect to receive in return for paying their taxes. 
• According to this theory, people may be more willing to pay taxes if they believe that the money will be spent in a way that personally benefits them. 
• If, on the other hand, government spending is not likely to directly benefit them, taxpayers are less likely to pay their taxes. 
• So taxes that are purely aimed at redistribution of wealth may not appeal to a lot of taxpayers.

US Case study

• In a research project, a team of four US researchers studied well over 2,000 households in Dallas County, USA, to gauge how their willingness to pay property taxes changes with new information on how the government spent its money.
• Household were not fully aware about how the property taxes that they paid went towards funding public education in their localities.
• When the households were informed that their government spent a larger share of their taxes towards funding public education, there was significant change in their behaviour. 
• It was found out the citizens, whose children went to public schools, were more willing to pay their taxes & less likely to appeal their taxation in courts. However, there wasn’t any noticeable changes from Citizens who didn’t avail public education.
• This study concluded that people were willing to pay taxes when they realized that they were personally benefitting from it.

What lesson does this study hold for India?

• The study’s conclusions may hold lessons for countries like India where there is a significant share of tax evasion due to the fact that citizens do not feel that they receive sufficient benefits from the government for the taxes that they pay.
• One way to encourage people to pay taxes would be to make information about how tax revenues are being spent by the government more accessible to citizens. 
• It is recommended that the government should offer detailed information on the various purposes (such as health, education, roads, etc) towards which tax collections will be earmarked. 

Connecting the dots:

• Union Budget 2022
• Economic Survey 2022-23