Who Pays What? Tax Enforcement, Trust, and Unofficial Payments in Transition Economies

• In Event: Behavioral Tax: Fairness and Trust

Abstract

Tax administration is critical for the effective functioning of governments around the world. With significant institutional changes occurring in transition economies over the past twenty years, the impact of tax enforcement and verification activities on firms is evolving. In an environment where large-scale corruption continues to plague the public sector, we examine the relationships between tax enforcement and unofficial payments that firms make to public officials in transition economies. We specifically investigate the influences of formal regulatory and informal cultural institutions on the outcomes of tax enforcement activities. We use a sample of nearly 6,000 firms representing 21 transition economies collected as part of the BEEPS dataset, and find that tax enforcement activities in the form of visits and inspections by tax officials have a positive association with the frequency of tax-related unofficial payments. That relationship is weakened in countries with higher regulatory quality. The level of trust is also important and, in the presence of verification activities, increases the frequency of unofficial payments. Due to the voids in formal institutions, informal institutions play an important role in all business transactions. Overall, the study emphasizes the importance of examining relationships holistically where micro (firm) and macro (country) influences are evaluated. Broadly, the study highlights unintended consequences that can occur in concert with tax administration changes aimed to improve tax compliance.

Authors

• Amy M Hageman, Kansas State University

• Anna Alon, Rollins College