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
There are 2 versions of this paper
Tax Toleration and Tax Compliance: How Government Affects the Propensity of Firms to Enter the Unofficial Economy
Tax Toleration and Tax Compliance: How Government Affects the Propensity of Firms to Enter the Unofficial Economy
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: Suggested Citation
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