Tax Compliance in a Decentralized System: The Impact of Trust and Enforcement

Abstract Tax morale, a key driver of tax compliance, is believed to be strongly influenced by institutional trust. If decentralization fosters trust in government, we would expect higher levels of voluntary compliance in a decentralized context. Similarly, if citizens perceive stronger enforcement in a decentralized tax administration, we would expect compliance to be higher. To evaluate the relationship between decentralization and tax morale, we examine the Spanish case, which is characterized by two substantially different institutional arrangements for tax decentralization: a general regime, which is partially decentralized, and the so-called foral regime, which operates in two regions and is fully decentralized. We draw on data from a unique survey. The results show that residents in fully decentralized regions do not exhibit higher levels of tax morale, nor do they perceive a higher level of enforcement. Thus, any structuring of tax administration within a federal system should not assume that decentralization leads to higher levels of compliance.