Analysis of the Tax Compliance in the EU: VECM and SEM

Marius-Răzvan Surugiu,Camelia Surugiu,Cristina-Raluca Mazilescu

doi:10.3390/math9172170

Marius-Răzvan Surugiu, Camelia Surugiu + Show 1 more

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https://doi.org/10.3390/math9172170

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Abstract

Tax compliance is an important indicator for the proper functioning of the tax authority, influencing the budget revenue level. In this study, a Vector Error Correction Model (VECM) analysis was developed to identify the long-term relationships between the compliance in individual income taxation (taxpayer’s behavior), public trust in politicians (trust in authorities), and rule of law (power of the authorities), using unbalanced panel data for the European Union (EU28) during the 2007–2017 period. The results underline the causality of the long-run relationships between the variables. The results of the VECM analysis underline the need for various support measures for voluntary tax compliance, with the trust variable having an important impact on tax compliance. In addition, a Structural Equation Modeling (SEM) analysis was employed using an improved data set with variables such as the compliance in corporation taxation (taxpayer’s behavior), wastefulness of government spending, and quality of the education system. The results of the SEM analysis underline the positive and significant influences of the variables on tax compliance.

Highlights

Taxpayers and governments generally have different targets in the area of taxation
Structural Equation Modeling (SEM) involves the development of a model, in which different aspects of a phenomenon are presented as a structure, a system of equations, with relationships between variables
This study empirically investigated the long-term relationships and the causal relationships between tax compliance, public trust in politicians, and power of authorities

Summary

Introduction

Taxpayers and governments generally have different targets in the area of taxation. On the one hand, taxpayers want to pay as little tax as possible, but governments have a growing need for financial resources. Governments should attempt to motivate taxpayers to comply with tax law, using their power and by creating a trusting relationship with them. The power of and trust in the authorities may represent factors related to the tax compliance level (taxpayer’s behavior). The power of and trust in the authorities are important variables, according to the “slippery slope” framework [1], a concept related to the economic and psychological factors of tax compliance. Tax compliance may be stimulated by the deterrence of tax evasion (audits and fines, meaning the authorities’ power perception) and by developing a trusting relationship with taxpayers (services and support). The main idea underlined by this framework is related to the relationship between taxpayers and authorities. The “slippery slope” framework is the main motivation for this paper

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