THE SHADOW ECONOMY IN LATVIA: CHARACTERISTICS OF THE DEMAND SIDE.

This study performs an empirical analysis on the characteristics of individuals' willingness to engage in the shadow economy. The focus of the paper is on the demand side of the shadow economy: willingness to purchase products or services for a lower price in exchange for not reporting the activity to the tax administration institutions. A nationally representative survey data of 1,001 individuals in Latvia is used to examine the relationship between tax-compliant behaviour, fear of punishment, material deprivation and government efficiency. The survey results show that the demand side of the shadow economy is widespread, as the acquisition of goods and services are carried out by many Latvians, including those who do not receive undeclared income. Economic constraints drive the demand, but the engagement with the shadow economy has a strong relationship also with the perceived quality of government efficiency in public spending and corruption level assessment. On the other hand, trust in the tax administration or the perceived probability to get caught for evading taxes does not correlate with the decision to acquire goods or services for a lower price by not paying taxes. The study contributes to the current shadow economy research by showing that the tax morale on the demand side is not driven exclusively by a material deprivation. Policies that simultaneously address effective public spending, eliminates corruption and focus on poverty reduction has the potential to limit the demand side of the shadow economy. [ABSTRACT FROM AUTHOR]