mathematics Article Analysis of the Tax Compliance in the EU: VECM and SEM Marius-Răzvan Surugiu 1, * , Cristina-Raluca Mazilescu 1 and Camelia Surugiu 2   Citation: Surugiu, M.-R.; Mazilescu, C.-R.; Surugiu, C. Analysis of the Tax Compliance in the EU: VECM and SEM. Mathematics 2021, 9, 2170. https://doi.org/10.3390/ math9172170 Academic Editor: Mihaela Paun Received: 8 July 2021 Accepted: 31 August 2021 Published: 5 September 2021 Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affil- iations. Copyright: © 2021 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). 1 Institute of National Economy, 050711 Bucharest, Romania; ralucamazilescu@gmail.com 2 Faculty of Administration and Business, University of Bucharest, 030018 Bucharest, Romania; cameliasurugiu@gmail.com * Correspondence: mariussurugiu@yahoo.com Abstract: Tax compliance is an important indicator for the proper functioning of the tax authority, influencing the budget revenue level. In this study, a Vector Error Correction Model (VECM) analysis was developed to identify the long-term relationships between the compliance in individual income taxation (taxpayer’s behavior), public trust in politicians (trust in authorities), and rule of law (power of the authorities), using unbalanced panel data for the European Union (EU28) during the 2007–2017 period. The results underline the causality of the long-run relationships between the variables. The results of the VECM analysis underline the need for various support measures for voluntary tax compliance, with the trust variable having an important impact on tax compliance. In addition, a Structural Equation Modeling (SEM) analysis was employed using an improved data set with variables such as the compliance in corporation taxation (taxpayer’s behavior), wastefulness of government spending, and quality of the education system. The results of the SEM analysis underline the positive and significant influences of the variables on tax compliance. Keywords: tax policy; tax behavior; tax compliance; cointegration; unit root; stationarity; EU28 1. Introduction Taxpayers and governments generally have different targets in the area of taxation. On the one hand, taxpayers want to pay as little tax as possible, but governments have a growing need for financial resources. For taxpayers, taxes represent a burden. Governments should attempt to motivate taxpayers to comply with tax law, using their power and by creating a trusting relationship with them. The power of and trust in the authorities may represent factors related to the tax compliance level (taxpayer’s behavior). The power of and trust in the authorities are important variables, according to the “slippery slope” framework [1], a concept related to the economic and psychological factors of tax compliance. When discussing the trust in and power of the authorities, previous research based on surveys has focused on aspects such as social norms, justice perceptions, audit probability, and fines. Tax compliance may be stimulated by the deterrence of tax evasion (audits and fines, meaning the authorities’ power perception) and by developing a trusting relationship with taxpayers (services and support). The main idea underlined by this framework is related to the relationship between taxpayers and authorities. The “slippery slope” framework is the main motivation for this paper. Stimulating tax compliance is important for increasing the level of budget revenues. These revenues are further used in public programs, to increase the overall efficiency of the allocation of the resources, and to increase equity and improve resource distribution [2]. Tax compliance underlines the timely reporting and payment of taxes. This indicator emphasizes the fulfilment of tax obligations as specified by the law. This paper examines the long-term relationship between the tax compliance of individuals (taxci), trust in the authorities (trust) and the power of the authorities (power) for the European Union (EU28) case between 2007 and 2017. The data set is represented by an unbalanced panel, and the Mathematics 2021, 9, 2170. https://doi.org/10.3390/math9172170 https://www.mdpi.com/journal/mathematics