Tax compliance, public spending and happiness in Europe

Abstract

Purpose This study aims to analyze whether tax compliance is the basis for the short-run dynamics of the development of welfare and happiness. The strengthening of tax compliance of corporates and citizens is not only important to achieve the goals assumed by fiscal policy but also is part of the values that can generate a higher level of welfare and happiness in Europe. Design/methodology/approach This study uses a dynamic factor model to offer new indexes that allow to monitor tax compliance, public spending and happiness trajectories and to evaluate their short-run relationships. Next, an analysis of the cyclical characteristics in terms of duration, amplitude and intensity is provided using the Harding and Pagan method (2002). Findings The empirical findings show that the European countries were able to reinforce tax compliance during the expansionary periods of the economy, and this has made it possible to increase public spending, and indirectly, happiness. Otherwise, this paper shows that the contractions of public resources during the global crisis, such as the case in the COVID-19, reduced the possibilities of well-being in Europe and made it more difficult to increase public spending and happiness. Research limitations/implications This study tries to analyze the transmission channels and relationships of three very complex variables: tax compliance, public spending and happiness. Incorporating these three variables into this research, with a short-run perspective, the authors have opened a new line of research that enriched the previous analysis. Therefore, the authors’ results should be considered the first step, that this study is going to continue to unravel the complexity of these relationships. Practical implications The design of policies aimed at improving individual, corporate and the well-being of nations needs them to incorporate elements of tax compliance as an objective that has economic and social implications. Individuals and corporates contribute to a fairer and more equitable society through compliance with tax obligations. Originality/value To the best of the authors’ knowledge, this is the first paper that offers evidence on the short-run dynamics of tax revenue, public spending and happiness for a better understanding of their relationships and behavior during the different periods of the economy.