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Tax Morale, Entrepreneurship, and the Irregular Economy

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Abstract

This paper incorporates tax morale into a search and matching model of equilibrium unemployment, with on-the-job search, extended to both the irregular sector and entrepreneurship. Tax morale is modelled as a social norm for tax compliance which renders evasion costly. The moral cost of tax evasion (the strength of the social norm) is negatively related to the fraction of entrepreneurs that evades taxes. Precisely, if the relationship is non-linear, multiple equilibria may emerge, thus accounting for differences in-between regions and countries in the size of the irregular sector. The “good” equilibrium is in fact characterised, with respect to the “bad” one, by a smaller irregular sector and a stronger tax morale.

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Bibliographic Info

Article provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its journal AUCO Czech Economic Review.

Volume (Year): 5 (2011)
Issue (Month): 2 (August)
Pages: 116-131

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Handle: RePEc:fau:aucocz:au2011_116

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Keywords: Entrepreneurship; tax evasion; tax morale; job search theory; irregular/shadow/hidden/underground economy;

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Cited by:
  1. Gabriele Ruiu & Gaetano Lisi, 2011. "Tax Morale, Slippery-Slope Framework and Tax Compliance: A Cross-section Analysis," Working Papers 2011-05, Universita' di Cassino, Dipartimento di Scienze Economiche.

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