The Impact of Trust in Government on Tax Paying Behavior of Nonfarm Sole Proprietors

Abstract

Abstract The paper explores the relationship between the taxpayers’ trust in government and their willingness to pay taxes. When honored, trust promotes feelings of goodwill between individuals, strengthens democracy, and reduces transaction costs in economic exchange. Literature on government regulation finds that if citizens trust the government they are more likely to comply with laws and regulations. In this article, the index of trust in government calculated by the American National Elections Studies (ANES) and the AGI (adjusted gross income) gap produced by the Department of Commerce’s Bureau of Economic Analysis (BEA) are used to test an empirical model if trust in government has a positive impact on tax compliance of the least compliant taxpayers group - nonfarm sole proprietors - controlling for the deterrent effects of tax enforcement. The results indicate that the higher trust in government improves tax compliance. The paper contributes to the existing literature on tax compliance by combining survey and statistical income reporting data to find evidence that perceptions about the trust in the government translate into actual tax payments