Do Citizens Respond to Tax Reforms during Conflict? Ukraine Experiment

• In Event: Ukraine and Ethnic Relations

Abstract

Do Citizens Respond to Tax Reforms during Conflict? Experimental Evidence from Ukraine
Marc P. Berenson and Sarah Birch
King’s College London

Scholarly research indicates that well-designed tax regimes can increase taxpayer compliance. However, our knowledge of the contextual influences on this effect is limited, and we know little about how effective proposed tax reforms that introduce incentives might be during conflict. This paper analyses the impact of hypothetical tax reforms in wartime Ukraine. Ukraine is a state with historically low levels of tax compliance, making it an appropriate context in which to assess the potential benefits of reforms designed to increase compliance. It has also been severely affected by the Russian invasion in February 2022. Our analysis draws on the results of a survey experiment (N = 1,003) conducted approximately eighteen months following the invasion, in the summer of 2023. We find that proposed reforms increase compliance even during wartime, including among those whose material well-being has been most severely affected by the conflict. However, we also find that the prospect of reforms has no impact on compliance propensity among those living in areas that are on the front line of the conflict.

Levying taxes on a population is one of the main functions of a state, and the importance of this function increases dramatically at times of war (Levy 1988; Tilly 1975). Scholarly research indicates that well-designed tax regimes can increase taxpayer compliance (Pomeranz and Vila-Belda 2019; Alm, McClelland and Schultze 1992). However, our knowledge of the contextual influences on this effect is limited, and we know little about how effective tax reforms might be during wartime. There is a dearth of research on the attitudes of citizens toward taxation during conflict. Fragmentary evidence sheds light on this topic. Bodea and LeBas find higher rates of tax compliance in areas of urban Nigeria that were affected by low-intensity conflict (Bodea and LeBas 2016). Other studies find that conflict depresses popular support for taxation. Bank, Stark and Thorndike show decreased support for taxes in the US during the invasions of Afghanistan and Iraq (Bank, Stark and Thorndike 2008). Flores-Macías and Sánchez-Talanquer likewise demonstrate a link between lower support for taxes and perceptions of criminal violence in Mexico, due to lack of trust in the state (Flores-Macías and Sánchez-Talanquer 2020). Yet there is scant evidence of popular attitudes toward the design of tax regimes during wartime.

This is an important question for several reasons. Wars are costly and states therefore require fiscal capacity to wage war; popular willingness to contribute to the public purse is therefore an important determinant of a state’s force generation capabilities. Moreover, understanding wartime willingness to pay tax may help to explain post-war variations in attitudes toward taxation. Finally, probing the differential impact of level of conflict exposure on attitudes toward fiscal institutions serves to inform proposals for wartime tax reforms.

This paper contributes to answering these questions by exploring the attitudes of Ukrainians toward tax design with a view to understanding how the wartime situation experienced by the country since February 2022 has affected attitudes towards proposed reforms. Leveraging the results of a survey experiment conducted approximately 18 months following the invasion, in the summer of 2023, the analysis assesses the extent to which policy incentives designed to encourage tax compliance are likely to achieve their aims in the post-war situation.
We find that proposed reforms increase compliance even during wartime, including among those whose material well-being has been most severely affected by the conflict. However, we also find that the prospect of reforms has no impact on compliance propensity among those living in areas that are on the front line of the conflict. The overall results indicate, as expected, that reforms that introduce tax incentives increase stated propensity to comply with tax law in Ukraine. These results indicate that even in wartime, the design of tax laws shapes citizen willingness to contribute to the public purse.

When we segment the data according to whether a respondent lived in a region that was on the frontline of the conflict at the time of the survey and where fieldwork was carried out (Donetsk’, Kharkiv, Zaporizhzhia and Kherson), we find that the treatment only has an impact in non-frontline conflict regions. This indicates that being subject to conflict dampened the extent to which respondents were sensitive to variations in the future tax regime. The further one is away from the severity of unceasing conflict, the more one might be able to think about and plan for the future – literally, a future after war, whereas those in the thick of it may not be able to think forward to such a time given all that remains undecided.

Authors

• Marc P. Berenson, King's College London

• Sarah Birch, King's College London