An evaluation of the shadow economy in Baltic states: a tax morale perspective

Abstract

To explain the shadow economy in the Baltic states of Estonia, Lithuania and Latvia, this paper evaluates the relationship between the shadow economy and tax morale. Viewing tax morale as a measure of the symmetry between the codified laws and regulations of formal institutions (state morality) and the unwritten socially shared rules of informal institutions (civic morality), the proposition is that the lower the tax morale (i.e., the greater the asymmetry between state morality and civic morality), the greater is the propensity to participate in the shadow economy. To evaluate this, a 2013 survey is reported involving 3,036 face-to-face interviews in these three Baltic nations. Using ordered logistic regression analysis, the finding is that the lower is the tax morale of individuals, population groups and countries, the greater is the propensity to participate in the shadow economy. The paper then explores the implications for theorising and tackling the shadow economy.

Tax morale and institutional theory: a systematic review

“…Culture has impact on tax morale. There are cultural differences within and between countries influencing tax morale , Brink and Porcano (2016), D'Attoma (2015), Feld and Torgler (2007), Feld et al (2008), Frey and Torgler (2007), Horodnic and Williams (2016), Kountouris and Remoundou (2013), Torgler (2002Torgler ( /2003Torgler ( , 2004bTorgler ( , c, 2005b , d, 2005a, Torgler and Murphy (2004 The higher the tax evasion is perceived, the lower the tax morale Alm and Gomez (2008), Çevik (2016), Frey and Torgler (2007), Molero and Pujol (2012), Torgler and Schaffner (2007)…”

“…Starting with culture, which represents broad social norms which are persistent in time (Luttmer and Singhal, 2014), a large body of literature identifies a relationship between the informal institutions and tax morale. Analysing individuals living in the same environment but from different cultures, Kountouris and Remoundou (2013) Alm and Torgler (2006), Chan et al (2018), Daude et al (2012), Doerrenberg and Peichl (2010), D'Attoma (2015), Filippin et al (2013), Frey and Torgler (2007), Lago-Peñas and Lago-Peñas (2010), Lubian and Zarri (2011), Torgler ( , c, 2004b, , Williams and Martinez (2014) Part-time employees, unemployed people and students have lower tax morale than full-time employees Daude et al (2012), Torgler ( , c, d, 2004b, Williams and Martinez (2014) Pensioners/retired have higher tax morale relative to non-pensioners Cyan et al (2016), Doerrenberg and Peichl (2010), Feld et al, 2008, Martins andGomes (2014), Torgler (2005c), Torgler and Murphy (2004), Vythelingum et al (2017) Housewives/housekeepers have lower tax morale Ibrahim et al (2015), Williams and Martinez (2014) Those engaged in undeclared work have lower tax morale Horodnic and Williams (2016), Williams andHorodnic (2016a, c, 2017b), Windebank and Horodnic (2016 Table III. 876 IJSSP 38,9/10 morale in the country of origin affects the tax morale of the individuals in the hosting country. Similarly, comparing the tax morale in a similar environment in terms of deterrent measures yet with different cultural features, a higher tax morale was identified in East than in West Germany, which shows that tax morale is driven rather by other factors than deterrents such as informal institutions (Feld and Torgler, 2007;Feld et al, 2008;Torgler, 2002…”

The Informal Sector, the “implicit” Social Contract, the Willingness to Pay Taxes and Tax Compliance in Zimbabwe

“…There is no unified definition of this sector. Others refer to it as the informal economy, the hidden economy, the shadow economy and undeclared economy amongst other names (Adom & Williams, 2014;Horodnic & Williams, 2016;Williams & Horodnic, 2016a, 2016b. Within the taxation context, Schneider and Enste (2000)'s definition of this economy would more appropriate.…”

“…Others propose that strengthening the deterrence measures reduces tax evasion (Feld & Frey, 2002), other find no meaningful association, yet others portend that the deterrence effort fuels tax non-compliance (Kaplanoglou & Rapanos, 2015) Empirical research has often exhibited findings that contradict the rational economic actor theory, compliance levels that are higher than those consistent with the deterrence theory and this has been the most significant criticism of the model. Researchers contend that the rational economic actor model is not enough to explain compliance levels, which are often higher than would ordinarily have been forecasted by the expected utility model (Horodnic & Williams, 2016;Horodnic, 2018;Torgler et al, 2008). According to Bitzenis and Vlachos (2018), in Greece and Dickerson (2014) in Cameroon, taxpayers comply beyond the "conditional co-operation", they comply even where the impact of audits and fines is small.…”

An Institutional Theory of Tax Non- Compliance in Bulgaria: a Tax Morale Approach

“…Indeed, lower levels of tax morale have been found to be significantly associated with higher levels of tax non-compliance (Brink and Porcano, 2016;Dell`Anno, 2009;Horodnic and Williams, 2016;Lima and Zaklan, 2008;Lisi, 2015;Ostapenko and Williams, 2016;Stark and Kirchler, 2017;Sumartaya and Hafidiah, 2014;Torgler, 2004a;Torgler et al, 2008;Williams and Horodnic, 2015a,b,c,d,e, 2016a,b, 2017aWindebank and Horodnic, 2017). Indeed, a strong negative correlation has been identified between tax morale and tax non-compliance with Pearson r values between -.46 and -.66 (Alm and Torgler, 2006;Torgler, 2011).…”