Institutional asymmetry as a challenge in tackling the grey economy in Bulgaria

Since EU accession in 2007, Bulgaria has ranked as the member state with the largest informal economy of some 31% of GDP. Despite diverse policy measures applied to crack down on tax evasion and undeclared work, some 'grey' practices, such as under-reporting salaries and turnover have flourished recently. The aim of this paper is to critically assess the effectiveness of the dominant policy approach in Bulgaria to tackle the shadow economy. It argues that the role of low tax morale and the high level of institutional incongruence have been neglected as drivers for widespread social legitimacy of informality. The strong focus of the authorities in recent years on administrative control measures creates a vicious circle in the long term - increasing the power of the state through deterrence while failing to guarantee procedural and redistributive fairness or highlight the benefits of compliance create an even greater mistrust by economic actors. Instead, the paper calls for considering an 'indirect' approach as an alternative strategy, by promoting voluntary commitment through pursuing a change in social norms and values, but also increasing the legitimacy of institutions and the quality of public goods and services to reduce the gap between taxpayers and the state.