– primarily in the OECD – have also relied on broader taxes on wealth, including taxes on inheritance, though these taxes have rarely been significant in non-OECD countries and have been declining everywhere over time. The weakness of wealth taxes has further undermined progressivity.

With respect to business taxation, much discussion has focused on concerns that small informal sector firms may enjoy unfair advantages, but most evidence suggests that these concerns are overblown. In revenue terms, taxation of small and informal firms represents a tiny share of overall revenues and would be unlikely to generate large amounts of revenue even with stronger enforcement. Meanwhile, in equity terms it appears that small firms – including those classified as informal – often continue to bear significant formal fiscal burdens. Small firms are subject to fees, levies, local taxes or indirect taxes embedded in prices, as well as significant informal burdens.<sup>129</sup> More broadly, it remains unclear whether weak taxation of SMEs undermines broader trust in tax systems among the bulk of taxpayers. Torgler and Schneider present survey evidence that lower tax morale is associated with larger informal sectors. But the dominant interpretation is that causation likely runs from low morale to larger informal sectors, rather than the reverse.<sup>130</sup> It seems more likely that it is weak compliance among wealthy individuals and larger firms that poses a greater threat to trust in tax systems.

If there is a pervasive feeling that tax enforcement is inequitable, the challenge for governments is both to address the problem, and to gain the trust of taxpayers that they have done so. Increasing transparency around what people or firms pay in taxes may hold significant potential. In one example at the local level in Ethiopia, widespread concerns that small business taxes were being applied inequitably led some local governments to allow local business associations to participate in local tax assessments. Some simplified models of property tax valuation employ formulas based on observable characteristics of properties, so as to make the basis for valuations – and thus taxation – fully transparent to taxpayers.<sup>131</sup> In a very different example, advocates for more equitable taxation at the international level have argued for making country-by-country reports capturing tax payments by multinational firms publicly available – in order to ensure that all are paying their “fair share”, create pressure for changes where they are not, and expand public confidence in the tax system. The most extreme example of tax transparency comes from Norway, which makes information on income, net worth and tax payments of every individual publicly available via a government web portal. The goal is to enhance trust in the tax system by demonstrating that everyone pays what is required under the law.

# **Reciprocity**

Reciprocity is perhaps the most intuitive of the four elements underlying trust in tax systems and lies at the core of the fiscal contract: the idea is that tax revenues will contribute to the provision of valued public goods and services. This concept is frequently at the heart of government outreach and education campaigns, which stress the need for taxes to fund national development. The

> 129 Joshi, A., Prichard, W., & Heady, C. (2014). Taxing the informal economy: The current state of knowledge and agendas for future research. _Journal of Development Studies_ , 50 (10):1325-1347.

> 130 Torgler, B., & Schneider, F. (2009). The impact of tax morale and institutional quality on the shadow economy. _Journal of Economic Psychology_ , 30 (2):228-245.

> 131 Jibao, S., & Prichard, W. (2016). Rebuilding local government finances after conflict: Lessons from a reform program in postconflict Sierra Leone. _Journal of Development Studies_ , 52 (12):1759-1775.

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