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

To authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1540-5907.2009.00415.x Byline: Douglas A. Hibbs (1), Violeta Piculescu (2) 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. Author Affiliation: (1)Gothenburg University (2)Gothenburg University Article note: Douglas A. Hibbs, Jr., is emeritus Professor of Economics and Senior Research Associate at the Center for Public Sector Research (CEFOS), Gothenburg University, 40530 Gothenburg, Sweden (douglas@douglas-hibbs.com). Violeta Piculescu is a PhD in Economics from Gothenburg University, 40530 Gothenburg, Sweden (violeta.piculescu@gmail.com).