Public perceptions of governance and tax evasion: insights from developed and developing economies

Abstract

Purpose This paper aims to explore how the role of the perception of good public governance reduces tax evasion (TE). Besides, this study investigates whether the nexus of public governance and TE differs between developed and developing economies. Design/methodology/approach Apart from the ordinary least squares (OLS) model, this study uses the linear mixed modeling technique. The World Governance Indicators and the multiple causes estimation (MIMIC) method are used to measure public governance. The shadow economy is used as a proxy for TE. Findings The results show that people's perceptions of public governance and the quality of government institutions are core elements that influence tax-evasion behavior. Besides, the rule of law (RoL) and political stability (PS) significantly impact tax-evasion behavior in developing countries. Nevertheless, the RoL, the control of corruption and PS are the most critical tax-evasion determinants among public governance indicators for developed countries. Regulatory quality shows a substantial positive relationship with TE in developed but not developing countries. Practical implications This paper provides a guide for policymakers on reducing tax-evasion behavior by paying more attention to maintaining the RoL and PS and fighting corruption. Additionally, this study highlights the importance of people's perceptions of the government's pursuit of the above policy-related improvements, which, in turn, affect their tax behavior. Originality/value To the best of the authors’ knowledge, this study is the first to explore the role of people's perceptions of improvements in public governance and how this can reduce TE behavior in developed and developing economies. Unlike prior studies, this study used the linear mixed model method, which is more advantageous than OLS and produces robust estimators.

Tax evasion and governance quality: The moderating role of adopting open government

“…According to Feld and Tyran (2002), rational taxpayers exhibit greater tax morale and increased tax compliance when they believe that the tax code represents their views and the preferences of the majority. Nimer et al (2022b) have found a significant negative relationship between VA and tax evasion in developed countries.…”

“…When taxpayers are uncertain about the future, they are more likely to hold cash and postpone their tax duties. Prior research has found a negative relationship between political stability and tax evasion (Nimer et al, 2022b).…”

“…In addition, this study enhances the conceptualization of the causal relationship between institutional capacity and tax evasion by using the deterrence model and the psychological tax contract model, which have been underutilized in previous research. A key distinction between this study and prior research (Nimer et al, 2022b;Yamen et al, 2023) is its specific focus on trade-based tax evasion, a significant contributor to the tax base shortage in developing countries. Thus, this study examines how a lack of government institutional capacity and transparency impedes government revenue mobilization and the allocation of funds intended for vital public services and economic development.…”

“…If taxpayers perceive that their government is inefficient and wasteful in delivering public services, the probability of tax law compliance decreases. Empirical evidence from several studies shows a negative relationship between GE and tax evasion (Nimer et al, 2022b;Yamen et al, 2018).…”

“…A good relationship between taxpayers and the government, established through simple and fair regulations, leads to higher tax compliance. Evidence also suggests that tax complexity is positively associated with higher tax evasion (Awasthi and Bayraktar, 2015;Nimer et al, 2022b).…”