Trust Me. An Empirical Analysis of Taxpayer Honesty

Abstract

A German proverb says that though trust is good, control is better. In this paper, we argue that the latter is not always the case. Rather, trust should be the preferred solution in situations where control is expensive and difficult, such as e.g. tax payers' fidelity to taxation laws. We argue that trust in governments is indeed an alternative motivational mechanism that can replace extensive controlling. We point out that there is a close rela- tion between the political process and people's willingness to obey that law; trust in a government therefore enhances taxpayer honesty. In our empirical analysis, trust in gov- ernments is found to be one of the major determinants of compliance with tax laws.