Tax cheating becomes more acceptable to citizens as government grows.
Economists have long recognized the critical role that citizens' trust in each other and their institutions plays in influencing economic performance. In high-trust societies, individuals need to spend fewer resources to protect themselves from being exploited in economic transactions. But the importance of trust also extends to the relationship between citizens and their government, in the sense that voluntary compliance with tax laws facilitates a large government buy may be eroded as the tax burden gets larger.
In Trust in Public Finance (NBER Working Paper No. 9187), NBER Research Associate Joel Slemrod uses data on trust and trustworthiness taken from the 1990 World Values Survey to investigate the relationship across countries between the size of government and the extent of tax cheating. He finds that there is less tax cheating in countries that exhibit more trustworthiness among citizens. However, holding constant the level of such trustworthiness, tax cheating becomes more acceptable to citizens as government grows. Although a trusting citizenry allows a government to grow, the tax burden needed to sustain a bigger government erodes taxpayers' willingness to comply with the tax laws.
Slemrod further finds that there is more economic prosperity and more government involvement in more trusting societies. He also uncovers a positive association between the size of the government and prosperity, at least until the level of government spending reaches 31 to 38 percent of GDP. Beyond that, the effect of the government's size is negative.
-- Les Picker