The importance of trust and how to measure it

Evidence from research

• Trust in government matters for compliance
• Trust in other taxpayers matters, too…
• …and so does trust in the tax authority itself
• Crises are unlikely to reduce the importance of trust for compliance
• Measuring trust – the challenge of getting it right

Empirical research lends plenty of support to the intuitively meaningful idea that a person’s compliance with some set of rules depend, among other things, on the degree to which the person shares the norms and values underlying these rules. It is also well established that the more you trust an institution and its representatives, the more likely you are to perceive rules and regulations set forth and enforced by that institution as legitimate, which in turn affects your willingness to comply.

Trust in government matters for compliance

• Analyzing data from a survey of 217 U.S. taxpayers, Jimenez & Iyer (2016) find that trust in government has a significant influence on both perceived fairness of the tax system and compliance decisions.
• In a survey among 392 independent accounting professionals in Turkey, Güzel, Özer & Özcan (2019) find that trust in government in general is systematically linked to tax justice perceptions and tax compliance. This indicates not only the importance of institutional environment and the perceived quality of institutions, but also that since trust in government in general matters for tax compliance, trust in the tax authority specifically is likely to be even more important.

Trust in other taxpayers matters, too…

• Trust in other taxpayers and trust in politicians also affects tax compliance: Using a survey of a representative sample of taxpayers in Sweden, Hammar, Jagers & Nordblom (2009) show that the more a taxpayer claims to trust other taxpayers, the less they suspect them to cheat. However, trust in politicians in parliament seems to be even more important: In this case, distrusting taxpayers are about twice as likely to perceive evasion of several specific types of taxes to be common compared to those who do not distrust the politicians in parliament.
• The findings of Hammar et al. reinforces a result from a previous, oft-cited study by Scholz & Lubell (1998), who used survey and tax return data from a sample of 299 middle- and upper-income taxpayers to show that both trust in government and trust in other citizens significantly increase the likelihood of tax compliance. This result holds even when taking into account the impact of an internalized sense of duty to obey laws and the fear of getting caught evading taxes.

…and so does trust in the tax authority itself

• Bornman (2015) reviews eight studies specifically dealing with the impact of trust in the tax administration on compliance and finds that not only procedural justice, legitimacy and identity (taxpayers’ identification with the community), but also personal norms affects compliance via the trust channel.
• Conducting lab experiments at several universities in both Italy and the US in order to compare results across different institutional and socio-economic contexts, D’Attoma (2020) finds that trust in the tax authority matters. When faced with various general tax decision scenarios, participants’ behavior did not differ systematically across countries – however, when asked to pay taxes to their real-world institutions, behaviors diverged significantly with Italians complying less than Americans.

Crises are unlikely to reduce the importance of trust for compliance

• The general dynamics of trust in institutions in general and tax authorities specifically and the importance for tax compliance are unlikely to change due to the present covid-19 pandemic. As Alm et al. (2020) argue, the reasoning applies not only to tax administration measures in general but equally so to tax measures related specifically to the Corona crisis.
• In a cross-country study of EU member states during the period 2000-2011, Kuokstis (2017) finds that trust mediates the relationship between economic environment and compliance, so that economic downturns affect high and low trust countries differently with respect to compliance. The argument is that high trust societies have more citizens with high tax morale, who are less likely to begin evading if strict economic incentives to do so increase due to an economic crisis. In low trust societies, on the other hand, more citizens make tax-related choices on purely rational grounds and thus start complying less in times of economic crisis.

Measuring trust – the challenge of getting it right (and knowing when you do)s

The most feasible option for tax authorities in measuring taxpayers’ trust in the tax authority, arguably, is to conduct public opinon surveys using questionnaires. However, choosing the right questions to ask in order to get valid measures of trust is not straightforward: While it is not so difficult to capture some aspect of taxpayers trust in the tax authority, capturing most (or even all) of the relevant aspects requires several questions and careful detailing of each of them. Furthermore, the arguments behind each question need careful consideration as well in order to substantiate what these questions actually measure in terms of different aspects of trust.

• Based on her review of studies of trust and tax compliance (see above), Bornman (2015) argues that survey measures of trust in tax administrations tend to be quite narrow in scope, relying on few questions and only measuring part of the palette of trust-relevant aspects. Thus, she argues that trust measurement can be improved by taking into account not just one aspect – procedural fairness, legitimacy, identification, and norms – but, preferably, all of them.