Cooperating Estonians and “exiting” Lithuanians: trust in times of crisis

Abstract

This article argues that substantial differences in political legitimacy can help explain why Estonia dealt with the recent economic crisis more successfully than Lithuania. In 2009, when the crisis hit hardest, Lithuania saw its budget deficit expand substantially, while Estonia managed to keep the deficit under 3% of GDP and consequently was invited to join the Eurozone, to which it acceded in 2011. The experience of these countries presents an interesting puzzle, as the divergent fiscal performance cannot be attributed to purely economic factors. Both countries have a similar economic structure, and both were similarly affected by the crisis. Furthermore, both pursued similar expenditure and tax policies during the crisis. Based on quantitative and qualitative evidence, it is argued that higher tax compliance and subsequently higher tax revenues can explain the difference. In turn, this compliance gap can be attributed to different levels of trust in political institutions in Estonia and Lithuania.

Keywords::

• Estonia
• Lithuania
• trust
• taxes
• tax morale

Acknowledgements

An earlier version of the article was presented at the ECPR Joint Sessions of Workshops which took place in Salamanca, Spain on 10–15 April 2014. The author thanks Magnus Feldmann and David Lektzian for useful comments.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Discretionary changes were calculated using estimates of tax changes' impact as a percentage of GDP provided by the European Commission (2010). These estimates should be treated with caution, however, as they are only approximate, not directly comparable, and do not exist for some countries and for certain tax categories.

2. In fact, discretionary adjustment for Lithuania underestimates the true extent of Lithuania's tax effort because calculations of tax changes' impact (European Commission 2010) do not take into account the changes in the system of social security contributions in Lithuania.

Additional information

Funding

This work was supported by a Postdoctoral fellowship funded by European Union Structural Fund project “Postdoctoral Fellowship Implementation in Lithuania” within the framework of the Measure for Enhancing Mobility of Scholars and Other Researchers and the Promotion of Student Research [VP1-3.1-ŠMM-01] of the Program of Human Resources Development Action Plan.