How trust begets deviance: Social and institutional trust as explanations for engagement in informal economic activities

Explaining why people engage in informal economic activities such as tax evasion is a hard nut to crack. Neoclassical economic theories and their behaviourist psychological counterparts explain noncompliance with the help of fairly parsimonious theories that mainly rest on taxation levels, deterrence and risk aversion. In a more institutional strand of theory construction, Alejandro Portes (e.g. 2010) develops an evenly parsimonious model introducing the  regulatory intent of a country, the enforcement of its rules, and finally the social wiring of a society and the groups it is built upon. This agenda setting text suggests that trust may have a paradoxical effect on informal activities. Social trust enhances people’s ability to withstand the enforcement of regulations, fostering informal activities. Trust in the official bodies of the state on the other hand, has the opposite effect. When citizens and groups put a lot of trust in the polity, i.e. see government regulation as legitimate, this will curb engagement in informal activities.

Although this line of thought has been developed from the 1990’s on, nobody seems to have tested the theory with the help of the available comparative data sets. That is exactly what this paper aims for. Next to a set of items of both kinds of trust, the ESS data of round 2 collected data regarding respondents’ self-reported tax evasion. This survey collected data in 24 countries, and serves as the basis of our analysis. The ESS survey will be complemented with data estimating the regulatory and taxation burden and the effectiveness of enforcement in those countries. The Portes thesis is tested with the help of a multilevel (multinomial) logistic regression analysis.

Reference
Portes, Alejandro. 2010. Economic sociology: a systematic inquiry. Princeton University Press.