Tax Toleration and Tax Compliance: How Government Affects the Propensity of Firms to Enter the Unofficial Economy

Douglas Hibbs ()

MPRA Paper from University Library of Munich, Germany

Abstract: How do government-supplied institutional benefits and the taxation and regulation of producers 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 H0 H26 (search for similar items in EconPapers)
Date: 2009-06-18
New Economics Papers: this item is included in nep-pbe
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Citations: View citations in EconPapers (2)

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Working Paper: Tax Toleration and Tax Compliance: How Government Affects the Propensity of Firms to Enter the Unofficial Economy (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:15897

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