Firms' Willingness to Pay Local Business Tax - The Impact of Trust and Public Goods

Abstract

This study analyzes whether and to what extent firms’ satisfaction with the provision of public goods and their trust in local governments’ handling of local business tax revenues are associated with their willingness to pay local business taxes. Using survey data on German small- and medium-sized firms, we find no significant association between firms’ overall satisfaction with the provision of public goods and their willingness to pay local business taxes. However, when distinguishing between personal- and business-related public goods, we find that satisfaction with public goods related to the personal sphere of firms’ decision-makers is associated with an increase in firms’ willingness to pay local business tax by about 6%. We observe no similar link for the actual provision of public goods. In contrast, trust in local governments’ handling of local business tax revenues is significantly associated with higher firms’ willingness to pay, with an effect size about twice as large as for satisfaction with personal-related public goods. Further, we document that higher average willingness to pay local business tax within a municipality is associated with a 13% reduction in tax avoidance. These findings underscore the critical role of transparent tax revenue management and trust-building in promoting tax compliance, offering actionable insights for local governments aiming to optimize tax collection and resource allocation.

Keywords: Tax Perception, Business Taxation, Tax Avoidance, Public Goods, Tax Revenue

JEL Classification: H25, H26, H41, H71, D91