International Journal of Management, Knowledge and Learning, 1(1), 91–108
Cultural Repercussions: Extending
Our Knowledge about How Values
of Trust and Confidence Influence
Tax Structures within Europe
Rune Ellemose Gulev
University of Applied Sciences Kiel, Germany
Hanna Lierse
Jacobs University Bremen, Germany
Within a unified Europe that is heading towards ever more harmonization,
it is interesting to examine why there exists such diversity in tax regimes
among its countries. Is it possible that some of the decisions pertaining to
taxation are based on latent cultural aspects? This study, set in a purely
European context, seeks to analyze tax variations within Europe through the
lens of cultural variations. Specifically, how trust, confidence and equality
matter with regard to tax revenues and tax progressivity. Within this regard,
we achieved strong results linking trust and confidence to higher tax revenues
and higher tax progressivity. That is, where trust among societal members
is low and confidence in public institutions is low, regimes opt for low tax
revenues and lenient tax rates. It is argued that where mistrust is high, the
issue of income distribution between societal members is likely to stay within
the private or individual sphere. Conversely, countries with high trust among
societal members exhibit higher levels of income distribution by delegating
more responsibility to public institutions, reflected in higher tax revenues and
more progressive tax structures.
Keywords: trust, confidence, culture, tax, income distribution, knowledge,
Europe
Introduction: Economic Cultures and Tax Regimes
In an increasingly intertwined Europe, actions of one country seldom go
without repercussions on other countries. Economic interdependence is
particularly strong in the European Union, where the members operate in
a common market and some even share a single currency. Although some
joint rules have been established in the field of taxes, we still observe re-
markable differences among the tax regimes of European states. Some
countries operate with high public revenue and progressive tax structures,
while other countries generate comparatively little revenue and have fairly
flat tax structures. For example in 2009, Denmark’s tax revenues amounted
www.issbs.si/press/ISSN/2232-5697/1_91-108.pdf
92 Rune Ellemose Gulev and Hanna Lierse
to almost 50 percent of GDP whereas Ireland’s only accounted for about 25
percent (OECD, 2010). This warrants a key question: why is there such di-
versity in tax regimes between EU countries?
A responsible answer to this question must address a multitude of as-
pects relating to the economic, historical and political makings of policy
outcomes. However, one avenue that has been disregarded in this debate
is the extent to which cultural bearings have an influence on tax regimes.
One reason for the neglect is that culture is often considered an elusive
term, which is difficult to be disentangled for empirical research (Guiso,
Sapienza, & Zingales, 2006). This paper seeks to offset this deficit by ex-
ploring one avenue of cultural insight that helps explain why some countries
opt for higher tax revenues and more progressive structures than others.
Specifically, it is the objective of this study to explore the role of the
two cultural dimensions of social equality and trust for tax outcomes. We
suggest that high trust and fairness norms lead to higher tax revenues
and more progressive tax structures. While fairness considerations have
received some attention as determinants of tax regimes (Plümper, Troeger,
& Winner, 2009), aspects of trust and confidence remain comparatively un-
explored. This surprises us as we consider the concept of trust pivotal for
the functioning of a society. Many business and social activities are facili-
tated where trust is high as suspicion and time spent controlling them are
lessened (Ariely, 2010, pp. 259). The willingness to contribute to common
goals is likely to be undermined in societies with high mistrust: we suspect
that people fear that others free-ride by avoiding taxes but nonetheless
enjoy the public goods provided by the state. Moreover, if mistrust in po-
litical institutions such as the government or the parliament is high and
they are regarded as opportunistic and budget maximizing bureaucrats, so-
ciety is likely to be more reluctant to contribute to the functioning public
institutions. Hence, in societies with constant suspicion, economic activ-
ity is likely to remain more in the individual and private sphere than being
produced jointly through public institutions.
Linking this notion with tax regimes, our underlying premise is that higher
levels of trust are correlated to higher levels of tax revenues. Societies that
have faith that others contribute their fair share and that the tax contribu-
tions are being spent correctly are more willing to accept higher levels of
public expenditure. Conversely, countries with low levels of trust and confi-
dence among societal members will have less faith in the integrity of their
societal counterparts and public institutions and are thus more reluctant to
accept high tax margins.
If this holds true, cultural aspects have important ramifications for how
governments should be addressing changes in their respective tax regimes.
For instance, a proposed tax increase or the introduction of a more progres-
International Journal of Management, Knowledge and Learning
Cultural Repercussions 93
sive structure in some countries may fail if not preceded by an attempt at
ensuring trust and confidence among societal members first.
The empirical analysis has a European focus and is rooted in data from
EU countries as well as Norway, Switzerland and Iceland. Data pertaining
to cultural variation are taken from the European Values Study (2008) while
the tax data stem from Eurostat (2011). Although the countries under in-
vestigation share historical roots, the variations are sufficiently large with
regard to their cultural traits and their tax systems to conduct rank correla-
tion tests.
Exploring the Theoretical Backdrop of Economic Culture and Taxes
The topic of economic culture is fairly new and yet highly arbitrary. Since
Berger (1986) formally introduced the topic as an interdisciplinary phe-
nomenon that addresses multiple social ideologies related to economics
and business values within a national culture, several differing versions of
economic culture have emerged. They all encompass the fundamental idea
of economic culture, yet differ along concept, paradigm and operationaliza-
tion of the phenomenon. As such, it must be noted that economic culture
is as elusive a term as it is attractive. Yet, at an agreeable definition, and
when used as an analytical tool, it serves as a powerful instrument to trace
and understand the origins of many of our economic and institutional be-
haviours.
The cardinal benefit of utilizing economic culture as an analytical tool
is to further the notion that economic behaviour has to be conceptualized
in a cultural context (Gulev, 2006; Hofstede & Hofstede, 2005; Trompe-
naars & Hampden-Turner, 2004). Facts and output indicators reveal only
little about economic behaviour; rather the economy is directed by interpre-
tations and preferences that are determined by subtle meanings, personal
justifications and the cognitive discourses that mould who we are and be-
come (O’Donnell, 2000). A further benefit, which the current research relies
on, is derived from country comparisons that economic cultural depictions
yield. The determinants of the economy and their impact on taxation are not
conducted through a uniform formula; economic manifestations are a prod-
uct of a complex culture-specific formula particular to each country of anal-
ysis. Hence using economic culture as an analytical tool reminds us that
each country has specific economic behaviours that can be traced back to
cultural origins (Salacuse, 1999). Origins that, when understood, can help
contextualize economic outcomes and allow for better utilization of societal
efforts to work in accordance with desired competitiveness levels.
To work towards this goal we propose a singular classification of eco-
nomic culture that depicts how our focus countries differ from each other
along socio-economic tendencies. By no means is the following economic
Volume 1, Issue 1, 2012
94 Rune Ellemose Gulev and Hanna Lierse
cultural country portrayal complete; it serves only to elucidate some spe-
cific economic cultural traits that are inherent to each of the countries and
that may bear latent repercussions to taxation.
Trust, Confidence and Equality as Cultural Dimensions
Attempting to link cultural dimensions to variations in tax regimes requires
digression away from mainstream cultural typologies. Accordingly, broad
classifications of culture, e. g. individualism vs. collectivism, neutral vs.
emotional, etc., (most notably those assembled by e. g. Hall, 1981; Hof-
stede, 2001, etc.) are, by their very nature of being broad, deemed in-
appropriate. Their generic construction, which made them hugely popular
and utilized, lessens the validity with which they can be applied to specific
analyses, such as those pertaining to taxation. Instead, we opt for cultural
depictions that are exact and detailed towards unique expressions of be-
havioural differences. This means our economic cultural typologies are not
primed for use in peripheral studies, but they serve to exactly examine the
factors of analysis of the current study. This limited scope reduces the elu-
siveness of the cultural terms and increases the buoyancy of the emerging
results (Gulev, 2009).
To gauge the extent to which our focus countries exhibit variations in
behaviour relating to how tax policies should materialize, we utilize two sets
of data from the European Values Study (EVS) (2008). The first set of EVS
(2008) variables that tapped in to the core of the study, namely exploring
levels of trust and confidence among societal members, consisted of the
following indicators:
•The extent to which most people in society can be trusted vs. the
feeling that you must be careful when dealing with people (v62). We
theorize that high trust among societal members will permit and pro-
mote tax progressivity.
•The extent to which confidence is expressed in parliament (v211) and
in the justice system (v218). For both these indicators, it is believed
that confidence in the altruistic behaviour of national institutions will
facilitate the willingness to support high tax structures and high tax
progressivity.
The second set of EVS (2008) data dealt with peripheral cultural traits
pertaining to equality that we suspected could also be linked to variations
in taxation partiality:
•The extent to which equality with no underprivileged people and social
class differences should be more important than personal freedom
where the possibility to develop without hindrance is primarily encour-
International Journal of Management, Knowledge and Learning
Cultural Repercussions 95
aged (v192). Variations with regard to this response would help illu-
minate which cultures feel that equality is more important than indi-
vidual freedom. We suspect this to be linked with taxation; those that
voice high levels of equality should be more supportive of progressive
tax structures.
•The extent to which people feel that individuals should take more
responsibility for providing for themselves vs. the state taking more
responsibility for ensuring that everyone is provided for (v194). We
hypothesize that support for individual responsibility would be biased
towards less progressive tax structures.
•The extent to which people feel that competition is good as it stimu-
lates people to work hard and develop new ideas vs. the notion that
competition is harmful and brings out the worst in people (v196). It
is theorized that groups of people belonging to the thought-line that
competition is good and promotes hard work in people will support
more lenient tax structures.
•The extent to which incomes should be made more equal vs. greater
incentive for individual effort (v198). We speculate that populaces
with inclinations towards income equality, will voice greater support
for high tax revenues and tax progressivity.
Determinant of Tax Outcomes
With the liberalisation of capital markets, scholars predicted a ‘race-to-the-
bottom’ in taxes (Zodrow & Mieszkowski, 1986). The models on tax compe-
tition are based on the idea that two countries share the same international
capital base and thus compete for attracting investments. As investments
are cost-sensitive and capital can freely move across borders, governments
engage in competitive tax cuts (for an overview see Wilson, 1999; Genschel
& Schwarz, 2011). As the two states do not cooperate by, for example,
setting a common minimum tax rate, the competition results in a race-to-
the-bottom where each state attempts to undercut the other one’s tax rate.
In equilibrium, tax revenue and capital tax rates are lower than they would
be without international competition. Scholars therefore initially predicted
that tax policies would converge around one single tax model (Steinmo,
1994). Accordingly, high tax revenues and progressive tax systems, it was
assumed, were not sustainable in the global economy (Rodrik, 1997).
In reality, tax convergence including the race-to-the-bottom is less evi-
dent. Certainly, the top personal and corporate income tax rates of many
European countries have been on the decline since the mid-1980s. For
example, in Germany and the United Kingdom the top rates on personal
income dropped from 56 and 60 percent in 1981 to 45 and 35 percent in
Volume 1, Issue 1, 2012
96 Rune Ellemose Gulev and Hanna Lierse
2010, respectively (OECD, 2011). Yet, tax revenues have, if anything, risen
since then. Moreover, European countries still have different tax regimes:
while some such as Sweden and Denmark have relatively high tax revenues
and progressive tax structures, others such as Latvia and Romania have
less redistributive tax systems.
Scholars traditionally highlight the role of path dependence, domes-
tic institutions and labour organisation to explain differences in tax out-
come (Basinger & Hallerberg, 2004; Garrett and Mitchell, 2001; Lierse &
Seelkopf, 2011). More recently, they have also referred to arguments of
fairness and political cultures that affect the size and the structure of taxes
(Koenig and Wegener, 2010; Lockhart, 2003; Nerré, 2008). For instance,
Lockhart (2003) shows how societal characteristics shape tax revenues by
focusing on the concept of political culture. The political cultures of the
United States and Sweden differ sharply: the former is predominantly in-
dividualistic, while Sweden is more egalitarian and hierarchical, which is
reflected in their tax regimes (Lockhart, 2003, p. 379):
Societies’ tax regimes offer clear indices of their predominant polit-
ical orientations. A society that practices modest tax extraction will
inevitably produce less active and extensive public institutions than
a society with a higher level of extraction. Accordingly, the former
will leave more responsibilities in private hands (those of individuals,
families, charities, and businesses), whereas the latter will realize a
broader range of social objectives through public programs.
Lockhart suggests that different cultural traits based on individualism
versus collectivism determine the extent to which a society raises taxes
and provides public goods. We argue that his focus on individualism ne-
glects the important aspect of trust: the underlying logic of our argument is
that voters generally prefer a low tax burden, but they also enjoy high levels
of government spending. The trade-off between the two is influenced by the
level of trust within a society. Trust and confidence contribute to the level of
taxes in a twofold manner: first, trust within society as such means that peo-
ple believe that everyone pays their taxes. If however, many people cheat on
their taxes and nonetheless receive the benefits of publicly provided goods,
then the social acceptance of paying the full amount is likely to decline lead-
ing to lower levels of tax revenue. Second, confidence in the political system
is likely to positively contribute to the amount of tax revenue raised. If the
public institutions and the politicians are regarded as opportunistic revenue-
maximizers who do not act to the benefit of the public, then the probability
is low that a party favouring a strong government based on high taxes will
find high public support. Overall, societal trust is therefore expected to be
positively correlated with the demand for public goods and tax revenue.
International Journal of Management, Knowledge and Learning
Cultural Repercussions 97
Some studies have also investigated the role of equity norms on the tax
structure and the way in which the tax burden is distributed between dif-
ferent societal groups. For instance, Plümper et al. (2009) look at capital
rates and investigate how fairness norms in terms of capital-labour equity,
determine a country’s response to international tax competition. Their main
argument is that voters are concerned about a ‘fair’ distribution of tax bur-
dens, and reduce government support when the difference between effec-
tive tax rates on labour and capital becomes too big. In their study they
find the effect of fairness norms significant and positively related to capital
taxes.
The main argument of the debate on fairness norms stems from the
horizontal and vertical equity theorem of public finances (Musgrave, 1959).
The former states that the same income, also if generated from different
sources, should be taxed at a uniform rate. This means that, no matter
whether I receive a certain income from capital returns or from a salary, it
should be taxed at the same rate. In contrast, the vertical equity theorem
postulates that people with a greater ability to pay taxes should pay more.
If the wealthy do not only pay a higher proportion but an increasing propor-
tion, then we refer to a progressive tax system, which is often associated
with more egalitarian societies as it enhances the redistribution of income.
Hence, we should expect that societies with more egalitarian values, tend
to have more progressive tax systems.
While equity norms are not necessarily related to the amount of taxes
raised, they are likely to affect the tax structure and the degree of pro-
gressivity and income distribution of a society. In sum, we expect different
degrees of trust and equality norms to generate differences in the tax sys-
tem as regards the overall level as well as the structure due to different
preferences for public good provision and income distribution.
The data for exhibiting tax variations in Europe are gathered from the
European Tax Statistics (European Commission, 2011) and the World Com-
petitiveness Yearbook (2010). We chose major indices such as the tax rev-
enue and public expenditure as a percent of GDP to evaluate the overall
amount of public expenditure (see Table 2). With regard to the tax rates, we
included measures of the top personal and corporate income tax rate, we
opted for the top marginal rates as they better reflect the progressivity of
a tax system. Moreover, we include a measure to distinguish between the
effective tax rate on capital and labour to evaluate whether different equity
norms correlate with how the tax burden is distributed. However, as top
tax rates can be arbitrary measures for progressivity, we further selected
three indicators to better account for actual income distribution within the
European countries. The Gini coefficient measures the inequality of income
distribution, where a value of 0 expresses total equality and a value of
Volume 1, Issue 1, 2012
98 Rune Ellemose Gulev and Hanna Lierse
100 maximal inequality. The final two indicators assess the percentage
of household incomes that goes to the highest and lowest ten percent of
households within a country. The more the highest and less the lowest ten
percent have of the total income, the higher is the income inequality. In sum,
these measures provide information on the extensiveness and the set-up
of tax systems as well as the income distribution of a country. They there-
fore serve as representative indicators to capture and compare the level
as well as the structure of taxes between countries, and can be linked to
the cultural dimensions of trust and equity norms developed in the previous
section.
Methodological Aspects of the Study
In the previous section, we outlined how culture is likely to affect tax out-
comes in the European Union. We argued that the two cultural dimensions
of trust and equality norms are likely to generate differences in the tax sys-
tem as regards the overall revenue generated by taxes and the way the tax
burden is distributed. In the following we briefly described the methodology
which we adopted to derive a conclusion about our stated hypotheses about
the relationship between culture and tax structures.
The data for economic culture and taxation structures are differentiated
along an important dimension. While the scores for taxation differences are
taken directly from European Tax Statistics (European Commission, 2011)
and the World Competitiveness Yearbook (2010), the scores for economic
culture are weighted results taken from multiple sources based on unpro-
cessed EVS data. This occurs because the EVS does not provide ultimate
scores, but leaves the data in its raw form. Accordingly, the data had to be
transformed into useable scores that are compatible with the former two
sets of data. For each EVS data set, this was accomplished by measur-
ing the EVS ordinal datasets on weighted bipolar scales; the more one set
of results gravitated towards one extreme, the less it could consequently
gravitate towards the other. This method was kept uniform for all the EVS
datasets and resulted in two indicators dealing specifically with trust and
confidence, and four indicators dealing with tangential cultural traits sus-
pected to influence tax structures.
The use of bipolar cultural descriptions is a controversial method of de-
picting cultural variances. On the one hand, its linearity nicely represents
diversity in cultures and, by viewing contrasting characteristics, amplifies
the significance and meaning of each culture. Yet, on the other hand, its
typology constrains the outcomes to the scale’s two-dimensional extremi-
ties and operates under the implied assumption that the more a culture
is biased towards one extreme, the less it may gravitate towards the other
(Trompenaars & Woolliams, 2003, p. 5). Although, the latter is true and
International Journal of Management, Knowledge and Learning
Cultural Repercussions 99
its ramifications must be respected, the current research lends support to
the methodology of bipolarizing cultures, as it allows for cultural discrepan-
cies to emerge between countries in a panoramic and controllable manner,
albeit noted, at the risk of encouraging potentially stereotypical general-
izations. Furthermore, the seven economic culture indicators are innately
contrasting. Therefore, a bipolar scale is a logical instrument to use, as an
indication towards one extremity necessitates a departure from the other
extremity.
To test the strength of the correlations between our cultural determi-
nants and taxation structures, we conducted cross-lateral Spearman rank
correlation tests fitted with confidence intervals for 28 data set samples to
verify if significant correlations exist. This involved a large number of tests
(altogether 166 separate correlation tests, of which 70 are included in this
study) which were conducted through a statistical correlation machine that
calculated the Spearman rank correlation coefficient (ρ) as:
ρ =
∑n
i=1 R(xi)R(yi)−n
(
n+1
2
)2
(∑n
i=1 R(xi)
2−n
(
n+1
2
)2)0.5 (∑n
i=1 R(yi)
2−n
(
n+1
2
)2)0.5 , (1)
where R(x) and R(y) are the ranks of a pair of variables (x and y) each
containing n (28) observations.
Results
Table 1 provides results pertaining to the rank order of each country in re-
lation to each of the seven cultural dimensions tailor made for this study.
As can be seen from the rank orders, for the four first cultural dimensions
there is little geographical consistency; sometimes Nordic countries rank as
most agreeing with the statements, sometimes Latin European or Central
and Eastern European countries agree most with the statements. Further,
countries that are often considered culturally similar (e. g. Spain and Portu-
gal or Norway and Sweden) seem to be spread out dissimilarly over a large
span. Such discrepancies are less apparent for the final three cultural di-
mensions that make up the core of this study. For trust and confidence in
society and societal institutions, we notice a predilection of Nordic coun-
tries to be grouped together and agreeing most with the statements. Latin
European and other continental countries score fairly neutrally, while Central
and Eastern European countries typically tended to agree least with these
statements.
Table 2 reveals the correlations that emerged between our cultural deter-
minants and our tax and distribution variables. The results indicate a variety
of meaningful correlations. Starting with culture’s connection with tax rev-
Volume 1, Issue 1, 2012
100 Rune Ellemose Gulev and Hanna Lierse
Table 1 Cultural Manifestations of Our Focus Countries
(1) (2) (3) (4) (5) (6) (7)
Countries that agree most with this statement
SE RO FR AT DK DK DK
RO UK ES SI NO LU NO
DK SW BG RO SE NO FI
NL SE BE DE FI SW SW
FI DE NL EL NL SE LU
NO IE LU FI SW SK IC
SI AT FI HU IC ES SE
PL PT LT SW UK NL AT
UK LU EL CZ DE IE FR
EE FI PL SE IE SI EE
EL FR IT PT AT FR UK
ES CZ PT ES BE FI NL
LT SK HU SK BG IC DE
HU DK AT FR EE BE BE
SK NL DK IE ES BG BG
LV LT EE PL IT PT IE
IE NO IE IC CZ DE EL
LU IC CZ UK LT IT PT
IC BE SI LT LU AT SI
BE BG LV BE PL EL LV
BG EE SW BG FR EE ES
AT PL UK NO LV UK PL
FR SI SE NL SI RO RO
IT HU SK EE EL LT HU
DE EL DE IT HU HU IT
SW LV NO LU PT PL CZ
CZ ES IC LV RO LV SK
PT IT RO DK SK CZ LT
Countries that agree least with this statement
Notes Column headings are as follows: (1) Equality is more important than freedom, (2) The
individual should take more responsibility, (3) Competition is harmful, (4) Incomes should be
made more equal, (5) Most people in society can be trusted, (6) Do you have confidence in
Parliament? (7) Do you have confidence in the justice system? Abbreviations: AT – Austria, BE
– Belgium, BG – Bulgaria, CZ – Czech Republic, DE – Germany, DK – Denmark, EE – Estonia,
EL – Greece, ES – Spain, FI – Finland, FR – France, HU – Hungary, IC – Iceland, IE – Ireland,
IT – Italy, LT – Lithuania, LU – Luxembourg, LV – Latvia, NL – Netherlands, NO – Norway, PL
– Poland, PT – Portugal, RO – Romania, SE – Sweden, SI – Slovenia, SK – Slovakia, SW –
Switzerland, UK – United Kingdom. Own creation based on EVS (2008) data.
enues as a percentage of GDP, we notice two highly significant correlations
at the 99% confidence interval. The first relates to ‘Trust in society’ (0.481)
International Journal of Management, Knowledge and Learning
Cultural Repercussions 101
Table 2 Correlations between Cultural Determinants and Tax/Income Indicators
As % of GDP Tax Rates Income Distribution
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Equality is more important than freedom (Q192)
–0.100 0.170 –0.142 0.071 –0.120 0.117 –0.064 0.227 0.030 0.188
The individual should take more responsibility (Q194)
–0.083 –0.021 –0.218 –0.074 –0.336* –0.156 –0.208 0.182 –0.117 0.173
Competition is harmful (Q196)
0.148 –0.215 0.208 0.291 –0.154 0.195 0.049 0.279 0.010 0.248
Incomes should be made more equal (Q198)
–0.027 –0.056 0.120 –0.165 –0.261 –0.011 –0.031 –0.138 0.246 –0.173
Most people in society can be trusted (Q62)
0.481* 0.369* 0.676** 0.227 0.390* 0.338* 0.387* –0.322 0.069 –0.286
Confidence in Parliament (Q211)
0.305 0.147 0.518** 0.342 0.290 0.034 0.398* –0.364* 0.083 –0.396*
Confidence in justice system (Q218)
0.516** 0.374* 0.595** 0.357* 0.437* 0.221 0.491** –0.313 0.186 –0.271
Notes Column headings are as follows: (1) tax revenue, (2) expenditure, (3) top personal income, (4)
corporate income, (5) consumption, (6) labor, (7) capital, (8) Gini index, (9) income of lowest 10%, (10)
Income of highest 10%. N=28, *p<0.05, **p<0.01. Own creation based on Spearman Rank Correlation
tests.
and the second to ‘Confidence in justice systems’ (0.516). As the inclina-
tion for both trust and confidence increases, we notice an increase in the
amount of tax revenue collected. At the 95% confidence interval, we notice
the same trend with regard to public expenditure. As the inclination of peo-
ple in a society is to have high levels of trust in each other, and confidence
in the justice system, public expenditure levels increase (0.369 and 0.374,
respectively).
Concerning ‘Personal top income tax rates,’ we achieve highly significant
correlations with ‘Trust in society’ (0.676) and our two confidence param-
eters: ‘Confidence in parliament’ (0.518) and ‘Confidence in the justice
system’ (0.595). Seen collectively, as these three cultural parameters in-
crease, personal income tax rates become higher. Or seen reversely, as
trust and confidence in national institutions diminishes, so do the top
marginal levels of personal taxation rates.
Consumption tax rates achieve significant correlations with three cul-
tural parameters: the feeling that the ‘State should take more responsibil-
ity’ (–0.336), ‘Trust in society’ (0.390) and ‘Confidence in justice systems’
(0.437). For the latter two, increases in trust and confidence again positively
correlate to progressive tax rates. Labour and capital tax rates were theo-
rized to exhibit strong positive correlations with culture. Along the cultural
dimensions ‘Trust in society,’ such significant correlations were achieved
(0.338 and 0.387, respectively). For capital tax rates, we also observed
significant positive correlations for ‘Confidence in parliament’ (0.398) and
Volume 1, Issue 1, 2012
102 Rune Ellemose Gulev and Hanna Lierse
a highly significant positive correlation for ‘Confidence in justice systems’
(0.491).
Finally, concerning income distribution, it is important to interpret the
results carefully. The significant negative correlations achieved for the ‘Gini
Index’ and ‘Confidence in Parliament’ (–0.364) and the negative correlation
achieved for ‘Income of highest 10%’ and ‘Confidence in Parliament’ (–
0.396) concur with the positive trends we have observed thus far for trust
and confidence. A high Gini score, and a high ‘Income of highest 10%’ score,
indicate inequality. Thus, where confidence and trust is high, we notice less
inequality in income distribution.
Besides the correlations that achieved significance, several noteworthy
results pertaining to failed or insignificant correlations emerged, that are
equally noteworthy to highlight. Predominantly, the scores achieved along
the cultural parameter ‘Incomes should be made more equal’ across all
topics related to tax structures were insignificant. The reasons for the fail-
ure of this seemingly strong connection to tax are discussed later. Equally
important to note from the table is the direction of the correlations under
the three categories of ‘Income distribution.’ Albeit the majority of correla-
tions being insignificant, it is difficult not to notice the overwhelming amount
of negative correlations connected with the ‘Gini Index’ and ‘Income of the
highest 10%’ and the positive correlations connected with ‘Income of the
lowest 10%.’ For all three, these correlations indicate that where trust and
confidence is voiced as important, income distribution reflects more equal
allocations.
Discussion of the Results
The results of our empirical analysis reveal significant correlations between
culture and income distribution. Surprisingly, the indicators for equity norms
mostly rendered trivial results, whereas trust and confidence results pro-
duced very significant correlations for many areas of taxation. Trust is not
only crucial for the level of tax revenue and expenditure levels but also for
inequality and income distribution. In the following we discuss the linkage
of the two categories of trust and equality with regard to variations in tax
systems.
Pertaining to the former, we expected that societal trust would be posi-
tively correlated with tax revenue as societal acceptance of paying taxes and
the confidence towards political institutions would increase. The hypothesis
can be confirmed at a 0.01 level of significance for ‘Trust in society’ (0.481)
and ‘Confidence in the Justice System’ (0.516). It shows that societies with
high levels of trust such as the Nordic countries also tend to have high tax
revenues. Certainly, we do not claim that trust directly causes high tax rev-
enues but the evidence shows that there is a significant linkage between
International Journal of Management, Knowledge and Learning
Cultural Repercussions 103
the two. Our theoretical argument elucidated the reasons for this: although
people favour both low taxes and high government spending, the provision
of common goods and institutions is facilitated by societal trust.
The results demonstrate that trust and confidence matter beyond what
we had expected. High levels are not only related to more public revenue but
also to higher tax rates in general. Although the correlations of our trust and
confidence indicators are particularly strong with the top personal income
and capital tax rate, its importance is not restricted to direct taxes. Also the
consumption tax rate is positively correlated. The evidence suggests that
trust is generally associated with higher tax rates, which is not surprising as
trust is correlated with higher tax revenues: those states that have higher
levels of tax revenue are also likely to have higher tax rates, as otherwise
they would not be able to reach high levels of revenue.
While trust is overall related to higher tax rates, the results show par-
ticularly significant relationships with the top personal income tax rate and
the capital tax rate. This suggests that trust and confidence do not only
positively contribute to higher public revenues but also to more progressive
tax systems. In other words, in such societies people do not only pay pro-
portionally more taxes to the state, but people with high incomes also pay
a greater proportion of their incomes than people with low incomes. Of our
sample, Denmark has the highest top personal income tax rate of 59 per-
cent whereas Romania only levies a rate of 16 percent in 2009. Moreover,
the six countries (Baltic and Eastern European countries) with the lowest
income tax rate are all based on flat tax systems, according to which peo-
ple pay taxes of the same proportion of their income, while those with the
highest rate (Nordic and Continental countries) are based on progressive
systems, which facilitates income redistribution as they impose higher tax
rates for upper incomes. This contributes to vertical equality (Musgrave,
1959, see also the second section).
The three measures on income distribution confirm this finding. While
most of the results of the last three columns (Table 2) are statistically
insignificant, they have the ‘right’ algebraic sign. The results for the Gini
Index and the ‘Highest 10%’ have a negative sign whereas the ‘Lowest 10%’
has a positive sign. This means that mistrust is positively correlated with
inequality, which reconfirms our hypothesis that trust positively contributes
to more progressive tax systems.
While cultural values related to confidence generate important insights
for understanding variations in European tax regimes, the indicators for
equality do so less. Previous studies suggest that equity norms affect the
tax structure and the way in which the tax burden is distributed between dif-
ferent societal groups (Plümper et al. 2009). Consequently, we suggested
that societies with more egalitarian values are likely to have more pro-
Volume 1, Issue 1, 2012
104 Rune Ellemose Gulev and Hanna Lierse
gressive tax systems. Yet, the empirical results do not confirm our initial
premise. The four selected questions from the EVS (2008), which account
for different measures of equality (Q192–Q196), only render one significant
correlation.
Why do we not find more significant correlations between tax structures
and equity norms? Are perceptions about fairness not important? There are
several reasons as to why the results are trivial. First, looking at Q198 in
more detail, it becomes obvious that the answers to ‘Should incomes be
made more equal’ are highly dependent on the status quo. Hence, the rank-
ings are not only influenced by cultural differences but to a large extent by
the actual level of inequality within a country. In societies where incomes are
fairly equal, the answer is likely to be more negative although equity norms
may be more pronounced. Second, with regard to Q192 ‘Equality is more
important than freedom,’ the descriptive statistics are crucial as the mean
is 1.59, on a scale from one to ten, where one signifies ‘personal freedom’
and ten ‘equality,’ with a standard deviation of 0.09. In other words, the
variation in cultural differences is so low among European countries that
it is almost impossible to have significant rank correlation. Third, the in-
significance of Q196 suggests that there is little public understanding of
the linkage between taxes and competition. Most people are likely to asso-
ciate competition with markets and companies rather than with taxes, which
makes it an inappropriate indicator for this study. Hence, Q192, Q196 and
Q198 are not optimal for measuring or comparing equity norms, although
for different reasons.
Finally, for (Q194) we find that individual responsibility is positively cor-
related with consumption taxes. This finding indicates that the higher the
consumption tax, such as the VAT and Excise taxes, the more likely we are to
be in a society in which individuals should take more responsibility for them-
selves. The correlation is not surprising as consumption taxes are indirect
taxes, which are charged irrespective of different levels of income. Hence,
governments intervene (redistribute) less and the responsibility (risk) stays
more within the individual. Yet, in the other areas of taxation, we do not
reveal significant results. Interestingly, Southern and Eastern European so-
cieties often favour more equality than other European countries (Table 1).
Although they have a high preference for redistribution and income equal-
ity, their levels of trust are comparatively low. Pitted against each other, it
appears that the existence of societal trust acts as a larger precondition
for governmental intervention and income redistribution than do stances on
equality.
Summing up, the analysis shows that trust and confidence of people
towards other members of their society is crucial for the provision of public
goods and institutions. If mistrust is high, more responsibility is likely to
International Journal of Management, Knowledge and Learning
Cultural Repercussions 105
stay within the private or individual sphere. Certainly, the results do not
reveal a direct causal link between trust and taxes; yet, they suggest a
causal link between mistrust and the size of the public sphere: issues of
tax evasion and suspicion in opportunistic behaviour by public institutions
undermine the willingness to contribute to common public goals. Hence, in
societies with constant suspicion, economic activity is likely to remain more
in the individual and private sphere than being produced jointly through
public institutions.
Conclusion
This article has sought to address the issue of why diversity exists in tax
regimes between European countries. There are multiple ways to address
this question involving historical, institutional and economic aspects. For
many researchers, it is felt that cultural aspects are so elusive that they
do not serve for empirical research as it is difficult to measure culture sci-
entifically, and hence cultural aspects are omitted from the discussion. We
show in our study how culture can be operationalized to measure linkages
between societal characteristics and income distribution. Based on data
from the EVS (2008), we constructed seven indicators, which reflect the
level of trust and of equity norms in European countries. With regard to the
taxes regimes and income distribution we involved a variety of variables to
account for the size of the public sector and the degree of income inequality
within the countries under investigation.
The empirical analysis does not show that culture directly affects tax
regimes and income distribution, but rather that a variety of significant cor-
relations exist between trust and the size and structure of the public sector.
Most notably, we notice a strong link between trust among societal mem-
bers to be positively linked with higher tax revenues and more progressive
tax structures. The correlations pertaining to confidence in institutions such
as parliament and justice systems further underscore this tendency: where
confidence is high, we notice tax structures of high progressivity. Put an-
other way, where trust is low and confidence in public institutions is low,
we observe lower tax revenues and a tendency towards flat systems for
personal income taxes.
This has important repercussions on policy-making. Gauging the extent
to which trust and confidence exists within a society may provide reliable
predictions of how adjustments to tax rates will be received and reacted to
by the public. Any increases in taxes, for instance, may be thwarted by a
cultural reluctance based on mistrust to accept higher tax rates. For policy
makers, it is important to understand the cultural undertones of what a
society is prepared to accept and what it will reject, so that sound policies,
including tax structures, can be made.
Volume 1, Issue 1, 2012
106 Rune Ellemose Gulev and Hanna Lierse
As with most cultural studies, the current paper suffers from some
shortcomings inherent to the cultural debate. Taking national cultural por-
trayals as representative of all the people within a country is highly con-
troversial; can we make fair representations of all the people of a coun-
try through country specific EVS data, or are sub-cultures and personal
variances within countries such dominant influences that they cannot be
discounted? Equally, controversial is the method of bipolarization of cul-
tures; is it always true that the more one gravitates towards one extreme
on a bipolar scale the less one can gravitate towards the other? Both of
these typical shortcomings of cultural analyses are apparent in the current
work, with the obvious consequence that the results must be interpreted
leniently. However, when acknowledging the existence and ramifications of
these shortcomings the results do provide value on a more holistic level:
a level relevant and appropriate to have as an outset to allow for deeper
continuations of cultural research. As such, the results of this study pro-
vide further nourishment for researchers and practitioners who subscribe
to the notion that differing modes of operations stemming from cultural dif-
ferences do persist in Europe (Klarsfeld & Mabey, 2004) and that these can
be further understood and worked with.
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Volume 1, Issue 1, 2012
108 Rune Ellemose Gulev and Hanna Lierse
Rune Ellemose Gulev teaches under- and post-graduate courses on cultural
variances at the University of Applied Sciences Kiel, Germany. For over 10
years he has been researching value based actions and linking them to man-
agement and business behaviour. Being from Denmark, but having lived and
worked mostly abroad, he is a firm believer in a unified Europe and initiatives
that celebrate cultural diversity. rune.e.gulev@fh-kiel.de
Hanna Lierse is a postdoctoral fellow at the Jacobs University Bremen and is
part of the research project ‘The Tax State and International Tax Policies.’ In
her latest research she analyses tax adjustment strategies during the crisis
as well as public attitudes towards taxing the rich. Her previous research has
pivoted around addressing the questions of the evolution of monetary and tax
policy cooperation in the European Union. h.lierse@jacobs-university.de
This paper is published under the terms of the Creative Commons
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License (http://creativecommons.org/licenses/by-nc-nd/3.0/).
International Journal of Management, Knowledge and Learning