Tax compliance, public spending and happiness in Europe

• DOI: https://doi.org/10.1108/CG-05-2021-0202
• Published date: 16 December 2021
• Date: 16 December 2021
• Pages: 577-591
• Subject Matter: Strategy,Corporate governance
• Author: María Jesús Delgado-Rodríguez,Sonia De Lucas-Santos

Tax compliance, public spending and

happiness in Europe

María Jes

us Delgado-Rodríguez and Sonia De Lucas-Santos

Abstract

Purpose –This study aims to analyzewhether tax compliance is the basis for theshort-run dynamics of

the development of welfare and happiness. The strengthening of tax compliance of corporates and

citizens is not only important to achievethe goals assumed by fiscal policy but also is part of the values

that can generatea higher level of welfare and happiness in Europe.

Design/methodology/approach –This study uses a dynamic factor model to offer new indexes that

allow to monitor tax compliance,public spending and happiness trajectoriesand to evaluate their short-

run relationships. Next, an analysis of the cyclical characteristics in terms of duration, amplitude and

intensityis provided using the Harding and Paganmethod (2002).

Findings –The empirical findings show that the European countries were able to reinforce tax

compliance during theexpansionary periods of the economy, and thishas made it possible to increase

public spending, and indirectly, happiness. Otherwise, this paper shows that the contractions of public

resources during the globalcrisis, such as the case in the COVID-19, reduced the possibilities of well-

being in Europeand made it more difficult to increase public spendingand happiness.

Research limitations/implications –This study tries to analyze the transmission channels and

relationships of three very complex variables: tax compliance, public spending and happiness.

Incorporating these three variables into this research, with a short-run perspective, the authors have

opened a new line of researchthat enriched the previous analysis. Therefore,the authors’ results should

be considered the first step, that this study is going to continue to unravel the complexity of these

relationships.

Practical implications –The design of policies aimed at improving individual, corporate andthe well-

being of nations needs them to incorporate elements of tax compliance as an objective that has

economic and social implications.Individuals and corporates contribute to a fairer and more equitable

societythrough compliance with tax obligations.

Originality/value –To the best of the authors’ knowledge,this is the first paper that offers evidence on

the short-rundynamics of tax revenue, public spending and happinessfor a better understandingof their

relationshipsand behavior during the different periodsof the economy.

Keywords Happiness, Welfare, Tax compliance, Public spending, Factor models, Dynamic analysis,

Evaluation, Social policy, Public policy, European Union

Paper type Research paper

1. Introduction

The payment of taxes is an obligation that all corporates and citizens must assume as part

of their activities (Oketch, 2004). The development of a fair and sustainable tax system

ensures that the resources raised will revert to society in multiple ways that will improve the

welfare state and enable more happiness for citizens (Bocken et al., 2013;Mgammal et al.,

2018). Nevertheless, tax compliance is still far from reaching the desired levels in many

countries in Europe, despite the efforts to improve it. In Europe, sectorial directives and

strategies as Europe 2020: Europe’s growthstrategy contribute to stimulating efforts toward

fairness and more efficiency for governments, companies and citizens. One factor that

prevents further development of taxes is that they are also considered a heavy burden for

Marı

´a Jes

us

Delgado-Rodrı

´guezis

based at the Department of

Applied Economics,

Universidad Rey Juan

Carlos, Madrid, Spain.

Sonia De Lucas-Santos is

based at the Department of

Applied Economics,

Statistics, Universidad

Aut

onoma de Madrid,

Madrid, Spain.

Received 28 May 2021

Revised 3 November 2021

Accepted 15 November 2021

DOI 10.1108/CG-05-2021-0202 VOL. 22 NO. 3 2022, pp. 577-591, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 577