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

Author

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  • Douglas A. Hibbs, Jr.
  • Violeta Piculescu

    (Göteborg University
    European University Institute)

Abstract

We propose a model of how 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. Our analysis implies that the incentive of firms to produce underground depends on tax rates relative to firmspecific thresholds of tax toleration that are decisively affected by quality of governance — in particular by the presence of high-grade institutions delivering services that profit-maximizing firms deem worth paying for. 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.

Suggested Citation

  • Douglas A. Hibbs, Jr. & Violeta Piculescu, 2008. "Tax Toleration and Tax Compliance: How Government Affects the Propensity of Firms to Enter the Unofficial Economy," Discussion Papers 7_2008, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
  • Handle: RePEc:prt:dpaper:7_2008
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    Cited by:

    1. Shirokova Galina & Knatko Dmitri & Vega Gina, 2013. "To Be or Not to Be: When Should a Threshold Firm in an Emerging Market Move to Professional Management?," EERC Working Paper Series 13/01e, EERC Research Network, Russia and CIS.
    2. Shirokova, Galina V. & Sokolova, Liubov S., 2013. "Exploring the Antecedents of Entrepreneurial Orientation in Russian SMEs: The Role of Institutional Environment," Working Papers 819, Graduate School of Management, St. Petersburg State University.

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    More about this item

    Keywords

    -;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • H0 - Public Economics - - General
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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