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

American Journal of Political Science, Vol. 54, No. 1, January 2010, Pp. 18–33

16 Pages Posted: 28 Dec 2005 Last revised: 30 Sep 2013

See all articles by Douglas A. Hibbs

Douglas A. Hibbs

University of Gothenburg - Center for Public Sector Research (CEFOS)

Violeta Piculescu

Department of Economics, Göteborg University

Multiple version iconThere are 2 versions of this paper

Date Written: January 25, 2010

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: institutions, corruption, tax evasion, tax toleration, unofficial economy

JEL Classification: D21, H26, K42, O17

Suggested Citation

Hibbs, Douglas A. and Piculescu, Violeta, Tax Toleration and Tax Compliance: How Government Affects the Propensity of Firms to Enter the Unofficial Economy (January 25, 2010). American Journal of Political Science, Vol. 54, No. 1, January 2010, Pp. 18–33, Available at SSRN: https://ssrn.com/abstract=872109

Douglas A. Hibbs (Contact Author)

University of Gothenburg - Center for Public Sector Research (CEFOS) ( email )

Sweden

HOME PAGE: http://www.douglas-hibbs.com/

Violeta Piculescu

Department of Economics, Göteborg University ( email )

Box 640
Vasagatan 1, E-building, floor 5 & 6
Göteborg, 40530
Sweden

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