Cash and the Hidden Economy: Experimental Evidence on Fighting Tax Evasion in Small Business Transactions

Abstract

Increasing the tax compliance of self-employed business owners—particularly of trade-specific service providers such as those involved in construction and repair work—remains an ongoing challenge for tax authorities. From a compliance point of view, cash transactions are particularly problematic when services are paid for on the spot, as these exchanges are difficult to audit. We present experimental evidence testing ten different policy strategies rooted in the enforcement, service, and trust/social paradigms, in a setting that allows payment either via a transaction that directly reports income for tax collection purposes or in cash, where taxes are only collected on reported income. Our sample includes both a typical subject pool of students, as used in most previous studies, and non-students who are active within service industries characterised by the opportunity to engage in cash transactions. While our comparative results show that, for both student and non-student participants, interventions that rely on greater enforcement by the tax authority have the greatest effect on compliance in our cash economy setting, treatments involving cooperative elements may be similarly effective in enhancing tax compliance. Given their effectiveness, cooperative approaches should therefore be considered for addition to the policy mix if implemented at relatively low costs, making both carrot and stick approaches promising to increase compliance in an environment where cash-for-service payments offer a common benefit for small businesses and their customers from implicit collusion that enables tax evasion.

WITHDRAWN: Developing an artificial intelligence framework to combat tax noncompliance in Botswana

“…sentiment depicts that the use of cash in Botswana is fuelling tax evasion and money laundering. This ndings a rms the literature documented byLopez (2017), who mentions that if the tax authorities are serious about eliminating completely tax noncompliance, cashless or paperless is the only solution since cash transaction do not develop a trail for the underlying transactions (Ridwan, Adbullah& Yusmita, 2022; Albecht, Koumpias, & Tassi, 2023;Chan et al, 2023).…”

National pride and tax compliance: A laboratory experiment using a physiological marker

“…Other future directions for research could include the use of a more representative sample of the taxpaying public, as opposed to the standard student subject pool, as a cross-check on the validity of the results [ 25 ]. Extensions to this study could focus on self-employed individuals and those active within service industries that are characterised by the opportunity to engage in cash transactions (e.g., [ 15 , 45 , 46 ]). Furthermore, analysing the difference between people who construct their identity at the state, regional, local, or family level in a way that is stronger than the national identity would lead to valuable insights, as would an experiment in an area with a strong separatist movement.…”

Whistleblowing in small and large accounting firms in Brazil

“…SMEs do not usually have the same structure as larger companies. Therefore, they may find it more difficult to develop and implement control systems and compliance units, or even to invest in training and fraud detection mechanisms (Chan et al, 2022). This organizational support represents an important set of determinants in encouraging whistleblowing behavior (Cho & Song, 2015).…”

“…Losses, damages, and fraud would therefore be identified earlier, reducing economic losses for accounting firms and their clients. In addition, the clients of small accounting firms are more likely to also be SMEs, and a larger governance in SME accounting has a greater potential impact on the business environment (Chan et al, 2022).…”