Tax price effects on attitudes to hypothecated tax increases

Abstract

Perceptions of private benefits from hypothecated tax increases may be more or less correlated with income both because individuals with different incomes have different interests in expanding public services and because they anticipate bearing different shares of the implied tax burden. We report on analysis of cross-sectional data from the United Kingdom in which respondents have been randomly allocated to different but precisely specified tax instruments in a way which should allow separation of the two effects. We estimate perceptions of tax costs and attitudes to tax increases jointly, finding little evidence of any effect from tax prices on perceptions of private benefits from increased public spending. This renders implausible the suggestion that the weak income correlations in this data might be arising from offsetting income and price effects. Nonetheless the special features of the data allow us to show perceptions of tax increases are correlated with both observed and unobserved influences on demand in a way which has the potential to generate serious biases in demand estimates if ignored.