Filling the tax gap: How private donations compensate a faltering fiscal contract

Abstract

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 freeriding. I argue that individuals may turn to civil society as an alternative way to fund public services. First, I leverage a natural experiment in Slovakia, based on the timing of a naming-and-shaming tax policy. Communities exposed to a public disclosure of noncompliance donate 16% more. Second, I replicate this via a survey experiment, showing an increase in charitable giving of 9% as well as eroding faith in the tax system. Highlighting the role of altruism, donations increase the most among respondents who believe their town relies on public services. In a conjoint, treated respondents also preferred public donations, suggesting an additional reputation mechanism. Finally, cross-country survey evidence bolsters external validity, showing a robust correlation between perceived tax cheating and local volunteering.