No. 158: Firms’ Perception of a Fair Tax Burden – The Impact of Trust and Public Goods

This study analyses how owner-managers’ satisfaction with public goods and their trust in municipalities’ handling of tax revenues shape firm-level tax attitudes. Using survey data from German small and medium-sized enterprises (SMEs), we find no significant association between SME owner-managers’ overall satisfaction with the provision of public goods and their perception of a fair tax burden (perceived fair tax rate). However, when distinguishing between public goods related to the SME owner-managers personal-and business-sphere, satisfaction with public goods tied to the personal-sphere is associated with an increase in the perceived fair tax rate of about 6%. We observe no similar link for the satisfaction with business-related public goods. By contrast, owner-managers’ trust in municipalities’ handling of tax revenues is strongly associated with higher perceived fair tax rates, with an effect size nearly twice that of satisfaction with personal-related public goods. Furthermore, municipalities where SME owner-managers report higher perceived fair tax rates, show on average a 13% reduction in firm-level tax avoidance. These findings underscore the critical role of transparent tax revenue management and trust-building in promoting tax compliance, offering actionable insights for municipalities seeking to strengthen sustainable exchange relationships with SMEs.