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Undeclared economic activity in central and eastern Europe -- how taxes contribute and how countries respond to the problem

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  • Leibfritz, Willi
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    Abstract

    The paper examines the incentives and distortions created by tax policy and administration structures that motivate individuals to undeclare or under-declare work in the new EU member countries. It analyses the tax level and the tax structure"mix"of tax instruments, the special taxation regimes set up to attract workers and entrepreneurs back into the formal economy and how tax policies such as the introduction of a"flat tax"on income from labor and capital impacted workers and entrepreneurs in terms of formalizing work. It also attempts to gain some insight into the effectiveness of tax administration by comparing some input and output measures As non-tax factors can amplify the adverse effects of taxes on the labor market and reduce the effectiveness of tax reform, some of these other economic framework conditions are also discussed. This paper concludes by refining the main results and possible best practices for tackling undeclared work. The paper argues that the new EU member countries have had mixed success tackling undeclared work. While taxation matters, other underlying conditions for formal sector activity are also important. Addressing the problem of undeclared work therefore requires a broad policy approach with further improvements in tax policies, tax administration, and in general economic framework conditions for formal sector activity.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5923.

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    Date of creation: 01 Dec 2011
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    Handle: RePEc:wbk:wbrwps:5923

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    Keywords: Taxation&Subsidies; Emerging Markets; Public Sector Economics; Debt Markets; Tax Law;

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    1. Agell, Jonas & Lindh, Thomas & Ohlsson, Henry, 1997. "Growth and the public sector: A critical review essay," European Journal of Political Economy, Elsevier, Elsevier, vol. 13(1), pages 33-52, February.
    2. Ognedal, Tone & Barth, Erling, 2005. "Unreported Labour," Memorandum, Oslo University, Department of Economics 28/2005, Oslo University, Department of Economics.
    3. Rita Cappariello & Roberta Zizza, 2010. "Dropping the Books and Working Off the Books," LABOUR, CEIS, CEIS, vol. 24(2), pages 139-162, 06.
    4. Jaanika Meriküll & Karsten Staehr, 2008. "Unreported employment and tax evasion in mid-transition : comparing developments and causes in the Baltic States," Bank of Estonia Working Papers, Bank of Estonia 2008-06, Bank of Estonia, revised 28 Nov 2008.
    5. Michael Keen & Alexander Klemm & Anna Ivanova, 2005. "The Russian Flat Tax Reform," IMF Working Papers 05/16, International Monetary Fund.
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    7. Konstantin Pashev, 2006. "Presumptive Taxation: Lessons from Bulgaria," Post-Communist Economies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 18(4), pages 399-418.
    8. Tonin, Mirco, 2011. "Minimum Wage and Tax Evasion: Theory and Evidence," IZA Discussion Papers 5660, Institute for the Study of Labor (IZA).
    9. Albu, Lucian-Liviu, 2007. "A model to estimate informal economy at regional level: Theoretical and empirical investigation," MPRA Paper 3760, University Library of Munich, Germany.
    10. Peracchi, Franco & Perotti, Valeria & Scarpetta, Stefano, 2007. "Informality and social protection : preliminary results from pilot surveys in Bulgaria and Colombia," Social Protection Discussion Papers 41541, The World Bank.
    11. Thomas Dalsgaard, 2008. "Tax and Welfare Reforms in the Czech Republic," IMF Working Papers 08/52, International Monetary Fund.
    12. Jan Hanousek & Filip Palda, 2008. "Tax Evasion Dynamics in the Czech Republic: First Evidence of an Evasional Kuznets Curve," CERGE-EI Working Papers wp360, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
    13. Kenneth A. Kriz & Jaanika Meriküll & Alari Paulus & Karsten Staehr, 2007. "Why Do Individuals Evade Payroll And Income Taxation In Estonia?," University of Tartu - Faculty of Economics and Business Administration Working Paper Series, Faculty of Economics and Business Administration, University of Tartu (Estonia) 49, Faculty of Economics and Business Administration, University of Tartu (Estonia).
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