The social compact between citizen and state - whereby a citizen pays taxes and receives public goods and services - is a critical link in the development process. This link is especially salient in the context of local governments, and a significant metric by which they are judged. However, if citizens perceive little benefit from their tax payments, or if local services are disconnected from local decision-making, the link between citizen and state can be broken. This can create a vicious cycle where citizens do not receive high quality services because resources are limited by low levels of local tax revenue. In turn, the low quality of services leads to a low willingness to pay taxes, and a broader lack of trust in the state.

Though policymakers in developing countries regularly express concern regarding low revenue generation and therefore low public good provision, few studies have examined whether strengthening the link between taxation and service provision can increase citizens' willingness to pay taxes. Simply informing citizens of the tax-benefit link does not seem to increase compliance (Blumenthal, Christian, and Slemrod 2001; Castro and Scartascini 2015). Laboratory experiments show that eliciting and promising to follow taxpayer preferences on government spending, on the other hand, can increase tax compliance (Alm, Jackson, and McKee 1993; Lamberton, De Neve, and Norton 2014). Other studies have found correlations between survey results on tax morale and service provision (OECD 2013) or have linked ex-post tax compliance to public service provision (Gonzalez-Navarro and Quintana-Domeque 2014). But there is still little evidence of the link between taxes paid and services delivered in a real world setting. 

This impact evaluation provides what is to the best of our knowledge the first experimental evidence on this question in a developing country. We partner with the Punjab, Pakistan provincial government to implement a series of interventions that strengthen the link between property taxes and local services in several ways - from simply eliciting taxpayers' preferences over local services, to earmarking a portion of tax revenues to be allocated to taxpayers' neighbourhoods, to a combination of both. This improvement in the social compact may have significant policy implications if it can lead to higher tax compliance and improved attitudes towards the state.

We implement the interventions in a large-scale randomized controlled trial in Lahore and Faisalabad, the two largest cities in Punjab.  We first construct a sample of 500 neighbourhoods, comprising of 100 to 400 contiguous taxable properties. Each neighbourhood is assigned to a control group or one of three interventions for three rounds: Local Allocation, Voice, or Voice-based Local Allocation.

In the status quo, revenue is collected from larger administrative tax units and distributed at the city-level for services - so citizens currently have no sense of how much of their taxes, if any, is spent on services within their locality, let alone how these services are chosen, or whether these services are the ones they desire.  In Local Allocation neighbourhoods, the local government commits to allocating a portion (35%) of property tax collected from a neighbourhood to service provision in that same neighbourhood. In Voice neighbourhoods, citizens are asked to provide preferences on the types of local goods and services should be prioritized in their neighbourhood. The Voice-based Local Allocation intervention combines preference elicitation and local allocation, whereby the local government allocates 35% of property tax revenue they receive to the specific goods and services requested by taxpayers. Citizens are informed of this earmarking, and the resultant service expenditures are indeed carried out in their locality. 

We evaluate the impact of these interventions by comparing outcomes in intervention neighbourhoods to control neighbourhoods, where taxes are collected and services are delivered as in the status quo. We estimate impacts on a range of outcomes including tax payments, tax morale, public goods quality, and attitudes towards the state. 

We have completed the interventions in all neighbourhoods and have delivered two rounds of services. We find that the project succeeded in eliciting citizen preferences and delivering services against them, thereby changing the relationship between tax collectors and citizens. However, despite successful delivery of services and finding small positive effects on citizens’ knowledge that they are participating in an intervention, citizens for the most part are unaware of being in a special scheme or of having received greater local goods. Not surprisingly, we therefore find muted effects on attitudes towards the state or tax payments. Given these results, we are conducting a third round of service delivery and surveys, which focus on raising awareness about where citizen tax payments are used through marketing campaigns during implementation. This continuation of the study will allow us to examine whether, once citizens are aware of the improved link between taxation and services, they change their tax payments and attitudes towards the state.

Last Modified: 08/24/2022
Modified by: Benjamin Olken