Vertical taxing rights and tax compliance norms

Abstract

This paper investigates the effects of multi-layer tax arrangements on tax compliance norms and behaviours of individuals in 49 Latin American and African countries. To date, the literature on tax compliance predominantly portrays the government-taxpayer relationship as bilateral. In practice, however, taxpayers have multiple payment obligations and often towards more than one tier of government. This paper argues for the consideration of multi-level tax arrangements in cross-country empirical enquiries on tax compliance norms and behaviours. It draws from the existing literature to posit that the vertical decision structure on tax matters by different government layers could influence tax compliance through, for instance, altering enforcement parameters, affecting compliance costs or shaping the fiscal exchange between citizens and the State through elements of trust, perception of public accountability and redistribution, and public utility. The empirical findings suggest that assigning taxing rights and discretionary powers on tax administration to subnational governments lower tendencies of compliance. The paper confirms the overarching hypothesis that inter-governmental tax arrangements matter for understanding tax compliance norms. The results are robust to multiple specifications, including the use of instrumental variables to address endogeneity concerns.