The Interaction between Trust and Power: Effects on Tax Compliance and Macroeconomics Implications

This paper aims to formalise both the role of trust (in) and power (of) tax authorities as major determinantsof tax compliance, and the interplay between trust and power and its influence on tax climate and overalltax compliance. Unlike the related literature that studies the role of the psychological determinants ofindividual tax compliance, this paper focuses on the macroeconomic implications of the “slippery slope”framework. The main finding is that trust-building actions are better than deterring measures. In a societywhere the tax authority respects the taxpayers and applies transparent and fair procedures, in fact, trustand tax compliance are higher, tax evasion is lower and thus the level of taxation can be reduced. Hence,firms open more vacancies, thus increasing the employment rate.