From flat to fair? The effects from a progressive tax reform

About this event

We study the effects of a progressive tax reform on tax compliance, using a research design that distinguishes between two channels. First, using a quasi-experimental design, we estimate the direct effects of the reform—namely, how changes in a household’s own tax rate affect its own compliance. Second, leveraging a large-scale natural field experiment, we estimate the indirect effects: holding a household’s own tax rate constant, we examine how its compliance is influenced by changes in the tax rates of other, poorer or richer, households. We find substantial direct effects: lowering taxes for poor households increases their compliance, while raising taxes for rich households reduces theirs. We also find sizable indirect effects: when poor households learn about the tax hikes on the rich, their stated perceptions of tax fairness and their actual compliance both increase. Among rich households, learning about tax cuts for the poor also improves perceived fairness, but, if anything, reduces compliance. Using an additional reform and follow-up field experiment conducted a year later, we replicate both the quasi-experimental and experimental results. Together, our findings show that tax compliance responds not only to a household’s own tax burden but also to its perception of fairness of the broader tax system. Our results also underscore the potential disconnect between stated and revealed preferences for redistribution. Finally, we present a counterfactual analysis that illustrates the implications of the direct and indirect effects for designing progressive tax reforms.