Analysis of the Tax Compliance in the EU: VECM and SEM

Tax compliance is an important indicator for the proper functioning of the tax authority, influencing the budget revenue level. In this study, a Vector Error Correction Model (VECM) analysis was developed to identify the long-term relationships between the compliance in individual income taxation (taxpayer's behavior), public trust in politicians (trust in authorities), and rule of law (power of the authorities), using unbalanced panel data for the European Union (EU28) during the 2007-2017 period. The results underline the causality of the long-run relationships between the variables. The results of the VECM analysis underline the need for various support measures for voluntary tax compliance, with the trust variable having an important impact on tax compliance. In addition, a Structural Equation Modeling (SEM) analysis was employed using an improved data set with variables such as the compliance in corporation taxation (taxpayer's behavior), wastefulness of government spending, and quality of the education system. The results of the SEM analysis underline the positive and significant influences of the variables on tax compliance.