Tax Morale, Entrepreneurship, and the Irregular Economy

Gaetano Lisi and Maurizio Pugno

Czech Economic Review, 2011, vol. 5, issue 2, 116-131

Abstract: This paper incorporates tax morale into a search and matching model of equilibrium unemployment, with on-the-job search, extended to both the irregular sector and entrepreneurship. Tax morale is modelled as a social norm for tax compliance which renders evasion costly. The moral cost of tax evasion (the strength of the social norm) is negatively related to the fraction of entrepreneurs that evades taxes. Precisely, if the relationship is non-linear, multiple equilibria may emerge, thus accounting for differences in-between regions and countries in the size of the irregular sector. The “good” equilibrium is in fact characterised, with respect to the “bad” one, by a smaller irregular sector and a stronger tax morale.

Keywords: Entrepreneurship; tax evasion; tax morale; job search theory; irregular/shadow/hidden/underground economy (search for similar items in EconPapers)
JEL-codes: E26 H26 J64 K42 L26 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (2)

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Working Paper: Tax Morale, Entrepreneurship, and the Irregular Economy (2011)
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