1 Cooperating Estonians and “exiting” Lithuanians: trust in times of crisis Forthcoming in Post-Soviet Affairs Vytautas Kuokštis* Faculty of Philosophy, Department of Sociology, and Institute of International Relations and Political Science, Vilnius University, Vilnius, Lithuania * Email: kuokstis@gmail.com This paper 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. Introduction You only find out who is swimming naked when the tide goes out —Warren Buffett (Norris 2008) Taxation has been at the core of establishing modern states and maintaining their successful operation. The ability to extract revenue from a population has been used as an indicator of a state’s capacity. This capacity is not a direct function of coercive capacities, however, but has been found to rely heavily on voluntary compliance on the part of population. In this light, the importance of trust and legitimacy arises. The quality of the relationship between the state and its citizens (as reflected in “political” trust) as well as among citizens themselves (“generalized” trust) are obviously important per se, but there are also good reasons to treat them as preconditions for successful economic performance in general and good fiscal results in particular.