Trust in Government in a Changing World: Shocks, Tax Evasion, and Economic Growth

Abstract

Governments are always dealing with unexpected shocks, like wars, terrorism, financial crises, natural disasters, and the like. A recent prominent example is the SARS-CoV-2 pandemic. Since early 2020, governments around the world have enacted a range of unprecedented measures in an attempt to protect their citizens, with quite mixed results. This varied record has in turn had dramatic effects on peoples’ perceptions of their government, especially on their trust in government and so on their willingness to obey the many government mandates generated by the pandemic. This willingness to obey government mandates extends well beyond pandemic policies to all other dimensions of government laws and regulations. An important dimension of individual compliance with government mandates is tax evasion. What will be the effects of the pandemic and the associated government policies on post-pandemic tax evasion and economic growth, especially via the effects of government policies on “trust” in the government? In this paper we incorporate both tax evasion and trust in an endogenous growth model in order to examine the short and long run impacts on tax evasion of various shocks – a pandemic shock, a government policies shock, and a tax morale shock (and the resulting impact on trust in government). We then use real data on 11 representative economies to simulate these effects, economies representing developed and developing countries as well as economies representing governments that opted for various policy responses to COVID-19, modelled as a labor productivity shock. We find that varied public policy responses to the pandemic have immediate and persistent impacts on tax evasion in the short and long run, largely via their effects on trust in government. We also find that these evasion impacts vary in important and predictable ways that depend especially on whether government dealt effectively or not with the pandemic. Our methodology is readily adapted to examine the effects of other shocks and their respective policy responses on trust in government, tax evasion, and economic growth.