WHICH IS THE BEST GOVERNMENT? COLLIGATING TAX COMPLIANCE AND CITIZENS' INSIGHTS REGARDING AUTHORITIES' ACTIONS.

AuthorBatrancea, Larissa
  1. Introduction

    'Which is the best government?', inquired Goethe in his 225th famous maxim (Goethe, 2013) when arguing about decisive qualities of a best government. In the realm of taxation, this question found itself in search for suitable answers within a wealth of studies. While some of them have emphasized the role of equity when designing tax policies (Alm, 1996; James, 1998; Finocchiaro Castro and Rizzo, 2014), some revolved around tax reductions or the increase of welfare outlays (Schmolders, 1960; Tyszka, 1994), others focused on tax system intricacy (Cussons, 2006; James, 2008) or its corruption (Vasina, 2003; Imam and Jacobs, 2007). Although these approaches offered cogent solutions, the best answer to the abovementioned question might consist in the following rhetorical inquiry: Could it be that the fundamental quality defining a best government when it comes to taxation lies precisely in its capacity to provide a balance between the adequate strategies of levying taxes and the appropriate mechanism of redistributing them under the form of public goods and services? As much as fiscal obligations stir auspicious conversations, lively debates, conspicuous economic analyses among professionals or small talks between lay people, their importance for the proper functioning of modern societies is undisputable. For that matter, the topic of taxation has been drawing the attention of both rulers and the governed populace since ancient times. In one of his plays, Shaw (2011, p. 40) visualizes a dialogue between Caesar (the ruler of Rome) and Pothinus (regent of Ptolemy, king of Egypt) regarding public levies: 'POTHINUS (bitterly). Is it possible that Caesar, the conqueror of the world, has time to occupy himself with such a trifle as our taxes? / CAESAR. My friend: taxes are the chief business of a conqueror of the world'. Forsooth, taxation is the essential constituent for any government or governor preoccupied with securing a certain level of well-being for the governed populace (Akay et al., 2012; Coelho, 2013; Corral, 2009; Dalziel and Saunders, 2014; Oishi, Schimmack and Diener, 2012). Through this mechanism of wealth redistribution, governments are able to finance citizens' basic needs regarding healthcare, infrastructure, schooling or national security.

    In the equation containing the strategies of appropriately levying taxes, on one side, and the mechanism of equitably redistributing them, on the other side, a key role is played by the way taxpayers perceive both the strategies of collecting fiscal obligations and the quality of public goods and services. Their perception is essential on the account that it is not the government performance per se, but the perception of government performance which influences trust in government (Lewis, 1978; OECD, 2013a, p. 21). Further on, trust in government and public institutions engenders an alteration in tax compliance behavior at the individual level (Fjeldstad, 2004), which ultimately impacts on the budget revenues. An abatement of trust in government triggers a decline of compliance with rules, standards and regulations in general (OECD, 2013a, p. 20) and with fiscal policy requirements in particular, causing a drop in the size of public budget. Conversely, an increase of trust brings forth an enhancement of paid taxes occasioning a rise in the state budget.

    Tax compliance and the factors driving it are the chief research topics in the field of tax behavior. Joining the scarce studies which attempt to uncover the puzzle of tax compliance through mediation analysis (e.g., Gangl et al., 2013; Murphy, 2008; Wahl, Muehlbacher and Kirchler, 2010), the current research investigates the extent to which perceptions regarding authorities' actions influence taxpayers' decisions to pay the fair share. To this end we put forward several mediation models and test them using the methodological precepts set by Hayes (2013). The novelty of our endeavor is twofold. First, we examine taxpayers' perceptions regarding both authorities' strategies of collecting taxes and the quality of goods and services provided. Second, we test the aforementioned connection worldwide, on a sample pool of 182 countries and territories, using data commissioned by well-known international organizations and researchers. Our results bolster the idea that trust in government is a significant powerful mediator of the relationship between several variables capturing citizens' perceptions regarding authorities' actions (i.e., transparency, taxation level, goods and services provided, political stability) and tax compliance. The paper offers a new standpoint on the climate of interaction between taxpayers and government in that taxpayers' insights mirrored in their level of trust in the government could assist authorities when designing better fiscal policies.

    The architecture of the paper is the following: i'n the second part, the literature concerning the variables of interest is unfolded along with the hypotheses to be tested. The third section is devoted to some methodological approaches regarding the mediation analysis. The fourth part presents the results of the mediation analyses. The last section concludes by drawing the main upshots of the study and enunciating various policy implications of our findings.

  2. Background literature and research hypotheses

    Although bearing a formal nature, interactions between citizens and state authorities (e.g., government) may be strengthened or weakened depending on the trust citizens pose in the ruling forces. According to Hardin (2001, p. 3), in such cases the trustee is incentivized to reciprocate (i.e., be trustworthy) by the potential benefits she might draw from future interactions with the trustor. Such being the case, one can state that trust is somewhat embedded in the novel 'quality of government' concept (Rothstein, 2011), which advocates for the establishment of trustworthy, fair-minded and responsible government institutions. In our study, the level of trust granted by citizens to the government was proxied by the item 1.04 'Public trust in politicians' included in the Global Competitiveness Report 2012-2013 (World Economic Forum, 2012, p. 391) and constructed on a scale from 1 ('very low') to 7 ('very high'). The item ranks countries based on answers to the question: 'How would you rate the level of public trust in the ethical standards of politicians in your country?'. The proxy was selected on the grounds that the political class within a country represents the wider sample from which governments are to be elected.

    Tax literature acknowledges that trust in politicians in general (Hammar, Jagers and Nordblom, 2009) and trust in government in particular (Fjeldstad, 2004; Kirchler, 2007; Torgler, 2003) increase tax compliance. We proxied the level of tax compliance by the size of the Shadow economy corresponding to the year 2006, estimated in Schneider (2012) through the MIMIC approach (i.e., 'multiple indicators multiple causes'). The size of untaxed economic activities is expressed as percentage of the official GDP, with lower values denoting higher levels of tax compliance on behalf of the country's taxpayers. The proxy selection was driven by the fact that various studies reported a converse relationship between shadow economy and tax compliance (e.g., Alm, Martinez-Vasquez and Schneider, 2004; Tanzi and Shome, 1993).

    Much like the scores of studies documenting the straightforward positive relationship between trust in public authorities (especially the government) and tax compliance, Bouckaert and van de Walle (2003) notice there are a multitude of criteria according to which citizens evaluate authorities' actions and establish the degree to which governments should be vested with trust. In the current paper, we focus our attention mainly on taxpayers' perceptions regarding government performance and we examine how these perceptions affect tax compliance when trust counts as a mediating variable. The subsequent paragraphs are dedicated to presenting the four hypotheses of our research endeavor along with the explanatory variables retrieved from well-established international rankings and databases commissioned by World Bank and World Economic Forum.

    The first criterion driving citizens' trust is the perception of the extent to which governments ensure the transparency of decisions within the public sector. Hence, the first hypothesis to be tested is:

    H1: The connection between Transparency of government policymaking and Shadow economy is mediated by Public trust in politicians.

    The perception concerning government's ability to regularly inform taxpayers about structural changes within policies was rated through the item 1.12 'Transparency of government policymaking' included in the Global Competitiveness Report 2012-2013 (World Economic Forum, 2012, p. 399) and constructed on a scale from 1 ('impossible') to 7 ('extremely easy'). The item ranked countries and territories based on answers to the inquiry: 'How easy is it for businesses in your country to obtain information about changes in government policies and regulations affecting their activities?'. Public trust depends on the availability of information and on the effort citizens make to remain connected with economic and political changes. When citizens perceive that policies are not completely disclosed, reluctance intervenes in their interactions with public officials. Studies acknowledge transparency as a fundamental public service value which underpins public trust (e.g., Birkinshaw, 2006; Cook, Jacobs and Kim, 2010; Grimmelikhuijsen et al., 2013; OECD, 2000a, 2000b) and as a human right (Birkinshaw, 2006). It dampers corruption, augments the legitimacy of the government and its performance (Grimmelikhuijsen et al., 2013, p. 575).

    A second criterion which adjusts the level of public trust in the ruling politicians is citizens' perceptions on how taxation levels...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT