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

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  • Hibbs, Douglas A.

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.

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  • Hibbs, Douglas A., 2009. "Tax Toleration and Tax Compliance: How Government Affects the Propensity of Firms to Enter the Unofficial Economy," MPRA Paper 15897, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:15897
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    Cited by:

    1. Shirokova Galina & Knatko Dmitri & Vega Gina, 2013. "To Be or Not to Be: When Should a Threshold Firm in an Emerging Market Move to Professional Management?," EERC Working Paper Series 13/01e, EERC Research Network, Russia and CIS.
    2. Shirokova, Galina V. & Sokolova, Liubov S., 2013. "Exploring the Antecedents of Entrepreneurial Orientation in Russian SMEs: The Role of Institutional Environment," Working Papers 819, Graduate School of Management, St. Petersburg State University.

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    More about this item

    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;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • H0 - Public Economics - - General
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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