Tax Toleration and Tax Compliance: How Government Affects the Propensity of Firms to Enter the Uno¢ cial Economy

Douglas Hibbs () and Violeta Piculescu ()
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Violeta Piculescu: Department of Economics, School of Economics and Commercial Law, Göteborg University, Postal: Box 640, SE 405 30 GÖTEBORG

No 173, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: How do government-supplied institutional benefits and the taxation and regulation of produc- ers affect the propensity of private firms to enter the unofficial economy and evade taxation? We propose a model in which the incentive of firms to operate underground depends on tax rates relative to firm-specific thresholds of tax toleration that are decisively affected by quality of governance - in particular by the presence of high-grade institutions delivering services enhancing official production that anchor profit-maximizing firms to the official economy. Some key predictions of the model concerning the determinants of firms' tax toleration and tax compliance receive broad support from empirical analyses of enterprise-level data from the World Bank's World Business Environment Surveys.

Keywords: tax toleration; tax compliance; tax evasion; corruption; quality of government; institutions; unofficial production; black economy; shadow economy; underground economy; micro political economy of firm behavior (search for similar items in EconPapers)
JEL-codes: D21 H26 K42 O17 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2005-08-23, Revised 2009-06-18
New Economics Papers: this item is included in nep-pbe, nep-pub, nep-reg and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in American Journal of Political Science, 2010, pages 18-33.

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