Re-assessing the merits of measuring tax evasions through surveys: Evidence from Serbian firms

This paper addresses the major weakness of measuring tax evasion through business and household surveys, namely the reluctance of respondents to answer truthfully due to the threat of disclosure. First, we assess the merits of a novel questioning method to gather information about tax evasion by means of business surveys. This approach allows estimating the prevalence of tax evasion, but it does not allow identifying whether the individual firm engages in tax evasion or not, therefore providing incentives for survey participants to answer truthfully. Second and contrary to most other business surveys, we differentiate between two common modes of tax evasion, namely underreporting of sales and informal supplements to official wages ('envelope wages'). Using evidence from Serbia, we show that the estimated share of firms which underreport sales and wages, respectively, by at least 10% is higher under the crosswise model compared to the case when conventional questioning methods applied in business surveys such as the World Bank Enterprise Surveys are used. However, the difference is only significant with respect to sales. These results appear to be robust to a number of modifications, and we explore various potential causes that lead to these results.