Abstract
To test if tax return can effectively and efficiently increase the acceptance of externality taxation, a laboratory experiment with a negative externality and taxation introduction ballots was conducted. Three treatments were applied as fractions of own tax payment returned to the taxpayer. The acceptance-efficiency trade-off predicted by theory proved empirically compatible with increases of 60 and 73 percent points in acceptance and efficiency, respectively, with a 50% return, demonstrating that acceptance may enhance efficiency, as confirmed by a decomposition of the latter. Notwithstanding, the upgrade to a 80% return rate failed to increase acceptance and reduced efficiency due, probably, to participants expecting the tax to have a small effect on the damage suffered from the externality generated by the other participants. Tax return thus proved socially justified but only in a limited extent, challenging the emerging consensus in experimental literature on effectiveness of pre-informed tax revenue recycling. Additionally, non-rational, non-profit-based and strategical voting were observed, what calls for more research to uncover and model actual behaviour, as input to design a revenue-recycling-based mechanism to incentivize acceptance.
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Notes
As demonstrated in section B of the supplementary information.
Only parameter β was altered, from $3 to $5, to have a larger profit after damage (fourth column of Table 1) in the situation with tax for at least two tax return levels, thus identifying the acceptance effect, without ending with fractional profits.
Let a detailed explanation to be offered. According with the fourth column of Table 1, let it be considered that the agent chooses, while voting, between tax and no tax, the latter yielding a profit of $14 (i.e., acceptance should be 100% under all returns yielding a profit of at least $14, and zero for the remaining returns). The return level is pre-defined by treatment randomization. Therefore, the agent would opt for tax under all return levels in which profit is at least $14. That is the case of 50% and 80% returns but not of zero return.
In the experiment, majority rule is adopted to map individual votes to the ballot outcome. This particular aggregation rule leads to no loss of generality regarding the theoretical predictions about voting. Or, to put differently, under RVA, other rules would not lead to different voting equilibrium. This is so because since agents are homogeneous and known that homogeneity prevails, they also known that others will vote just like oneself, and, thus Pigouvian taxation will be implemented when optimal for oneself and not implemented otherwise. If aggregation were based, for instance, on the vote of a randomly selected agent, the same outcome would be achieved. We thank one of the anonymous reviewers for calling attention for the usefulness of such clarifications.
The values are, “(…) from the first to the sixth unit, 76, 60, 46, 34, 28, and 24 [experimental points] (Heres et al. 2017)”.
The majority rule was adopted for being the standard in the Pigouvian taxation papers (Kallbekken et al. 2011, Cherry et al. 2012 and 2017, Tiezzi and Xiao, 2016, Heres et al. 2017). Other vote aggregation rules would probably lead to different experimental results, what could only be tested with treatments capturing distinct rules, which is thus left for future research.
In Table 1, individual profit without tax, no matter the treatment, is 14, and, with tax, 44 and 32, under, respectively, 0 or 50% and 80% tax return. So efficiency, measured as total profit, clearly depends on whether tax was implemented or not.
Carbone and Duffy (2014), observed imitation leading experimental participants away from optimal choice. Bernhard et al. (2006), observed participants to punish behaviour that did not directly affected them but violated a social norm, an evidence of altruism. Punishment was larger when the victim of violation belonged to the same group. Retaliation is also commonly observed on experimental games (Fehr and Gächter, 2000).
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Acknowledgements
This work was supported by the Coordenação de Aperfeiçoamento de Pessoal de Nível Superior—Brasil [Finance Code 001]. We thank Sergio Almeida from the University of São Paulo for commenting on an early draft of the paper.
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Morello, T.F., da Silva e Silva, L.F. Garnering support for Pigouvian taxation with tax return: a lab experiment. Environ Econ Policy Stud 25, 115–142 (2023). https://doi.org/10.1007/s10018-022-00345-x
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DOI: https://doi.org/10.1007/s10018-022-00345-x