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Filling the Tax Gap:

How Private Donations Compensate A Faltering Fiscal Contract

Do individuals contribute to public service provision when others in the community shirk on their taxes? The long-standing literature on conditional cooperation has widely documented a knock-on effect of free-riding. This study proposes an alternative logic when different channels of service provision are available. As tax noncompliance signals a faltering in the fiscal contract, individuals may turn to alternative social contracts, complementing state-sponsored public services through private donations to civil society. I test this argument in the case of Slovakia. First, I advance a natural experiment, leveraging the timing of a naming-and-shaming tax policy relative to NGO donation deadlines. Communities exposed to public disclosures of noncompliance donate 16\% more. Second, I employ a survey experiment to replicate this finding and shed light on its underlying mechanisms. A vignette treatment mimicking the disclosures raises charitable giving by 10\%. Additionally, it elicits beliefs of corruption and negligence in the tax system and lowers tax morale. In turn, donations increased the most among individuals who believe their town relies on public services. Finally, cross-country survey evidence bolsters the external validity of the Slovakia results, showing a robust correlation between perceived tax cheating by co-nationals and engagement with local NGOs. Taken together, the evidence supports the idea that individuals compensate for others' tax noncompliance by increasing private contributions to the provision of public services through civil society.

Paper (to request the current working paper draft, please get in touch!)

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