Collaborative tax evasion and social norms: why deterrence does not work

South East European Journal of Economics and Business

Franić

Dzhekova

2015

This paper proposes a way of explaining the undeclared economy that represents participation in undeclared work as a violation of the social contract between the state and its citizens, and as arising when the informal institutions comprising the norms, values and beliefs of citizens (civic morality) do not align with the codified laws and regulations of a society's formal institutions (state morality). Drawing upon evidence from 1,018 face-to-face interviews conducted in Bulgaria during 2013, the finding is that the greater is the asymmetry between formal and informal institutions (i.e., citizens' civic morality and state morality), the greater is the likelihood of participation in the undeclared economy, and vice versa. The outcome is that tackling the undeclared economy requires a focus upon reducing this lack of alignment of formal and informal institutions. How this can be achieved in Bulgaria in particular and South-East Europe and beyond more generally, is then discussed. JEL codes: H26, J46, O17

Section: Discussionmentioning

confidence: 99%

Explaining the Undeclared Economy in Bulgaria: an Institutional Asymmetry Perspective

South East European Journal of Economics and Business

Franić

Dzhekova

2015

“…However, the evidence that this is effective is less than conclusive. Although some argue that increasing the penalties and probability of detection reduces undeclared work, at least for some income groups (Klepper and Nagin, 1989;Varma and Doob, 1998), others reveal that this increases undeclared work, not least due to a breakdown of trust between the state and its citizens (Chang and Lai, 2004;Kirchler et al, 2014). Indeed, the perhaps most telling rebuttal of the rational actor model is that many voluntarily comply even when the benefit/cost ratio suggests that they should operate on an undeclared basis (Alm et al, 2012;Kirchler, 2007;Murphy, 2008;Murphy and Harris, 2007).…”

Section: Tackling Undeclared Work: Theoretical Framing and Hypothesismentioning

confidence: 99%

Tackling the undeclared economy in the European Union: an evaluation of the tax morale approach

Industrial Relations Journal

Horodnic

2016

To evaluate a new approach towards tackling the undeclared economy, which views participants as social actors rather than rational economic actors, this article reports evidence from 27,563 face-to-face interviews conducted across the European Union during 2013. Multilevel logistic regression analysis reveals a strong association between participation in undeclared work and the level of tax morale. Finding that higher tax morale (and thus a lower propensity to engage in undeclared work) is strongly correlated with greater levels of state intervention but also with individual-level characteristics such as gender, age, education and employment status, the article concludes not only by confirming a political economy approach and refuting modernization and neo-liberal explanations and remedies, but also by revealing for the first time the importance of solutions not so far considered, including improving educational attainment, older citizens mentoring for younger people and improving women's participation in the labour force.

“…The friendly persuasion group report higher earnings than the control group. 76 Examining formal institutions meanwhile, studies beyond the Balkans reveal that improving procedural justice, which refers to whether citizens perceive the government to treat them in a respectful, impartial and responsible manner, significantly improves compliance. 77 78 Similarly, so too does developing procedural fairness, which refers to the extent to which citizens believe that they are paying their fair share compared with others 79 80 81 82 and improving redistributive justice, which refers to whether citizens believe they receive the goods and services they deserve given the taxes that they pay.…”

Section: Indirect Controlsmentioning

confidence: 99%

Beyond a Deterrence Approach towards the Undeclared Economy: Some Lessons from Bulgaria

Journal of Balkan and Near Eastern Studies

Franić

2016

Until now, the undeclared economy has been tackled in Balkan countries by increasing the penalties and risk of detection so as to deter participation. Recently however, calls have been made for a new more indirect approach that improves tax morale in order to foster a culture of commitment to compliance. The aim of this paper is to evaluate these contrasting policy approaches. Reporting evidence from 1,018 face-to-face interviews conducted in Bulgaria during 2013, logistic regression analysis reveals no association between participation in undeclared work and the perceived level of penalties and risk of detection, but a strong association between participation in undeclared work and the level of tax morale. The paper concludes by discussing the theoretical and policy implications of the findings.