Trust in government and tax compliance

Abstract

their willingness to pay taxes voluntarily. The recent literature on tax compliance agrees that there are two elements to the answer of why people pay taxes. First is that taxpayers are deterred from tax evasion by the enforcement policies and actions of tax administrations. The other element refers to tax morale, or the willingness of citizens to pay their taxes correctly as a part of honoring their share of a larger social contract with the government. In this article, index of trust in government produced by the American National Elections Studies (ANES) serves to measure tax morale. The AGI (gross adjusted income) gap is used to measure tax compliance or tax evasion. This gap equals the unexplained difference between adjusted gross income (AGI) measured by the Department of Commerce’s Bureau of Economic Analysis (BEA) and adjusted gross income reported to the Internal Revenue Service (IRS). The paper contributes to the existing research on the determinants of tax morale in society and its effect on tax compliance by building and testing an empirical model if the reported perceptions about the trustworthiness of the government translate into actual tax payments.