Taxes, public services and democracy

In the field of public economics, the maxim that taxes are the price we pay for living in a democracy is well known. However, paying taxes doesn't directly benefit the individual taxpayer, but rather society as a whole, and it's often tempting to think that nothing bad will happen if you don't pay, because someone else will. For this reason, in addition to ensuring a tax administration that facilitates and guarantees effective tax compliance, it's beneficial for governments to foster trust in the public sector, so that people are more willing to pay taxes. This, for example, is what we found in a study conducted jointly with Leo Rizzo and Riccardo Secomandi, professors at the University of Ferrara and associate researchers at the IEB, in the context of the COVID-19 vaccination process.

Using data from a Spanish survey conducted at the beginning of the pandemic and subsequently repeated three times every six months, we were able to estimate that those who, due to their age, had already received the COVID-19 vaccine showed a clear and higher willingness to pay taxes compared to those who had not yet received it. In other words, when people had personally witnessed the efficient organization of the mass vaccination process and the peace of mind that the vaccine provided, their willingness to pay taxes increased. Although the pandemic context was certainly very specific—and, of course, it's best if it doesn't happen again—the above result does allow us to highlight the importance of trust in governments as one of the elements for improving tax compliance. But how can we improve that trust in our leaders?

The complexity of the topic would warrant many considerations that go far beyond the scope of this article, but a couple of points related to taxation can be highlighted. First, it would be beneficial for citizens to clearly understand which governments are responsible for different public services: who finances the service they receive? And what is the cost of this service? When there is a doctor's visit, medical treatment, or a surgical procedure, what is the approximate cost of the service received? Or when starting a degree at a public university, where in this case it is mandatory to pay a fee, tuition, but this only covers a small part of the cost, what is the total cost of the studies? This information should undoubtedly be known by the responsible administration, so why isn't it shared with the public?

Second, and in this case regarding taxes, how much do we pay and who pays it? Let's focus on income tax, the paradigmatic tax of modern fiscal systems. The withholding system for most income facilitates tax control and payment. The money no longer reaches the citizen's pocket (we receive our salary after withholding tax is deducted) and, therefore, it's money that's no longer factored into the family budget. Consequently, the withholding system is good from a compliance perspective, but at the same time, it reduces its visibility and fosters a lack of awareness about the total amount paid.

Who checks their net tax liability on their annual income tax return? Or are we only concerned about whether we have to pay more or get a refund? Furthermore, who checks their annual tax return for the national tax liability, paid to the central government, and the regional tax liability, paid to the Catalan government (Generalitat) in the case of Catalonia? In another study, this one with Luca Salvadori from the Autonomous University of Barcelona and also a researcher at the IEB, we observed that 60% of Spanish citizens don't know at which level of government they pay their income tax (IRPF). However, when they learn that the tax is also paid in their autonomous community, their willingness to pay increases. We are living in turbulent times where some are questioning fundamental aspects of democracy. Providing accurate information about how much is paid is a way of acknowledging the effort each person makes in financing public spending. Likewise, informing people about the cost of the public services they receive can help them better appreciate the service received, as well as be aware of its cost. These are small, inexpensive changes that can help us value our democratic system—undoubtedly imperfect, but infinitely better than its alternatives.