Garnering support for Pigouvian taxation with tax return: a lab experiment

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.