Re-assessing the merits of measuring tax evasion through business surveys: an application of the crosswise model

Abstract

Self-assessments by respondents in surveys are often the only available measure of tax evasion in developing countries at the microeconomic level. However, they suffer from the reluctance of respondents to reveal their own illicit behavior. This paper evaluates whether this weakness of self-assessments can at least partially be overcome through a novel questioning method, the crosswise model, which allows estimating the prevalence of tax evasion, but not identifying whether the individual respondent engages in tax evasion or not. Using evidence from Serbia, we show that crosswise model-based estimates of the share of firms which significantly underreport sales exceed those obtained from conventional methods by around 10 % points or more. With respect to wage underreporting to evade payroll tax and social security contributions, we do not find differences. These results appear to be robust to a number of modifications, and we explore various potential causes that lead to these results.

Financial constraints and firm tax evasion

“…10 However, the lack of formal high-quality audit data often makes these types of survey data the only way to investigate tax evasion at the microeconomic level. Also, as suggested by the results of Kundt, Misch, and Nerré (2017), our estimation results may only capture the lower bound of the impact of financial constraints on tax evasion, given that the survey data are likely to underestimate firm evasion.…”

“…However, while the indirect nature of the survey questions mitigates misreporting due to self-presentation reasons, answers to the questions may still be subject to misreporting due to a firm's misperceptions of its own behavior. Further, as shown by Kundt, Misch, and Nerré (2017), these survey data are likely to underestimate the true extent of firm tax evasion because a firm may be reluctant to answer truthfully questions about sensitive issues like tax evasion. 10 However, the lack of formal high-quality audit data often makes these types of survey data the only way to investigate tax evasion at the microeconomic level.…”

“…The same indirect approach is also used to measure other evasion variables (Percent 10 By protecting the privacy of respondents through bundling of sensitive questions about illicit behavior of the firms and about "harmless" topics, Kundt, Misch, and Nerré (2017) develop a new survey method (the "crosswise" model) to provide more credible estimates about the extent of tax evasion. However, their approach does not allow them to generate data that could be used to examine the determinants of tax evasion at the firm level.…”

Can detailed instructions and comprehension checks increase the validity of crosswise model estimates?

“…Fig 1 shows the CWM as a tree diagram. Significantly higher and thus presumably more valid prevalence estimates have been obtained via the CWM as compared to DQ for sensitive attributes such as xenophobia [10,11], plagiarism [12], tax evasion [13,14], distrust in the Trust Game [14], crossing the street on a red light in plain view of children [15], the use of anabolic steroids among bodybuilders [16], intention to vote for the far-right German party Alternative for Germany [17], and prejudice against female leaders [18]. Moreover, in one strong validation study, the CWM accurately estimated the prevalence of experimentally induced cheating behavior, while DQ led to a severe underestimation [19].…”

“…In contrast, we expected false negatives to occur more frequently in the DQ condition compared to the CWM condition due to the influence of socially desirable responding [cf. 10,12,13].…”