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What Explains Tax Evasion? An Empirical Assessment based on European Data

  • Edward Christie
  • Mario Holzner


    (The Vienna Institute for International Economic Studies, wiiw)

This study computes estimates of tax compliance in selected European countries for value added tax, excise tax, personal income tax and social security contributions, using national accounts data together with data on official tax structures and revenues. These estimates are then analysed to explain the differences in compliance rates across European countries and across time. In accordance with the classical models of Allingham-Sandmo and their successors, we find that tax evasion is positively correlated with the tax rate itself. However, we also find support for Bloomquist's hypothesis that higher income inequality leads to higher tax evasion. We also find that the quality of the judicial system plays a role in explaining VAT evasion, confirming general hypotheses on the main drivers of the shadow economy. Finally, we find that our chosen measure of tax complexity is positively correlated with tax compliance for personal income tax, leading us to doubt the soundness of 'flat tax' reforms in transition countries, at least with respect to their impact on compliance.

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Paper provided by The Vienna Institute for International Economic Studies, wiiw in its series wiiw Working Papers with number 40.

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Date of creation: Jun 2006
Date of revision:
Publication status: Published as wiiw Working Paper
Handle: RePEc:wii:wpaper:40
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  1. Naomi E. Feldman & Joel Slemrod, 2007. "Estimating tax noncompliance with evidence from unaudited tax returns," Economic Journal, Royal Economic Society, vol. 117(518), pages 327-352, 03.
  2. Schneider, Friedrich & Klinglmair, Robert, 2004. "Shadow Economies around the World: What Do We Know?," IZA Discussion Papers 1043, Institute for the Study of Labor (IZA).
  3. repec:att:wimass:9610 is not listed on IDEAS
  4. Friedrich Schneider & Dominik Enste, 2000. "Shadow Economies Around the World: Size, Causes, and Consequences," IMF Working Papers 00/26, International Monetary Fund.
  5. Anna Ivanova & Michael Keen & Alexander Klemm, 2005. "The Russian ‘flat tax’ reform," Economic Policy, CEPR;CES;MSH, vol. 20(43), pages 397-444, 07.
  6. Andreoni, J. & Erard, B. & Feinstein, J., 1996. "Tax Compliance," Working papers 9610r, Wisconsin Madison - Social Systems.
  7. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
  8. Andrea Gebauer & Chang Woon Nam & Rüdiger Parsche, 2003. "Is the Completion of EU Single Market Hindered by VAT Evasion?," CESifo Working Paper Series 974, CESifo Group Munich.
  9. Edward Christie & Mario Holzner, 2005. "Household Tax Compliance in Albania," wiiw Research Reports 316, The Vienna Institute for International Economic Studies, wiiw.
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