Abstract
This paper provides an evidence-based evaluation of the competing ways of explaining and tackling the informal economy. Conventionally, participants have been viewed as rational economic actors who engage in the informal economy when the benefits outweigh the costs, and thus participation is deterred by increasing the sanctions and/or risks of detection. Recently, however, an alternative social actor approach has emerged viewing participation to result from a lack of vertical trust (i.e., their norms, values and beliefs are not in symmetry with the laws and regulations) and horizontal trust (i.e., they believe many others are non-compliant). Reporting 2,000 face-to-face interviews conducted in Croatia in 2015, only a weak and partial association is found between participation in the informal economy and the perceived level of penalties and risks of detection, but a strong significant association with both the level of vertical and horizontal trust. Those who perceive a larger proportion of the population to be engaged in the informal economy, and those whose norms differ to the laws and regulations, display a significantly greater likelihood of participating in the informal economy. The theoretical and policy implications are then discussed.
References
Aliyev, H. (2015). Post-Soviet informality: towards theory-building. International Journal of Sociology and Social Policy, 35(3-4), 182-198.10.1108/IJSSP-05-2014-0041Search in Google Scholar
Allingham, M., Sandmo, A. (1972). Income tax evasion: a theoretical analysis. Journal of Public Economics, 1(2), 323-338.10.1016/0047-2727(72)90010-2Search in Google Scholar
Alm, J., Torgler, B. (2006). Culture differences and tax morale in the United States and in Europe. Journal of Economic Psychology, 27(2), 224-246.10.1016/j.joep.2005.09.002Search in Google Scholar
Alm, J., Torgler, B. (2011). Do ethics matter? tax compliance and morality. Journal of Business Ethics, 101, 635-651.10.1007/s10551-011-0761-9Search in Google Scholar
Alm, J., Cherry, T., Jones, M., & McKee, M. (2010). Taxpayer information assistance services and tax compliance behaviour. Journal of Economic Psychology, 31, 577-586.10.1016/j.joep.2010.03.018Search in Google Scholar
Alm, J., Kirchler, E., Muelhbacher, M., Gangl, K., Hofmann, E., Logler, C., & Pollai, M. (2012). Rethinking the research paradigms for analyzing tax compliance behaviour. CESifo forum, 10, 33-40.Search in Google Scholar
Alm, J., McClelland, G., & Schulze, W. (1992). Why do people pay taxes? Journal of Public Economics, 1, 323-338.10.1016/0047-2727(92)90040-MSearch in Google Scholar
Alm, J., Sanchez, I., & De Juan, A. (1995). Economic and non-economic factors in tax compliance. Kyklos, 48, 3-18.10.1111/j.1467-6435.1995.tb02312.xSearch in Google Scholar
Autio, E., & Fu, K. (2015). Economic and political institutions and entry into formal and informal entrepreneurship. Asia-Pacific Journal of Management, 32(1), 67-94.10.1007/s10490-014-9381-0Search in Google Scholar
Baric, M. (2016). Undeclared work in Croatia: a social exchange perspective, PhD thesis, Management School, University of Sheffield, Sheffield.Search in Google Scholar
Baric, M., Franic, F., & Polak, M. (2016). Tackling undeclared entrepreneurship in a transition setting: the case of Croatia. International Journal of Entrepreneurship and Small Business, 28(2/3), 255–274.10.1504/IJESB.2016.076645Search in Google Scholar
Barsoum, G. (2015). Striving for job security: The lived experience of employment informality among educated youth in Egypt. International Journal of Sociology and Social Policy, 35(5/6), 340-358.10.1108/IJSSP-01-2014-0006Search in Google Scholar
Baumol, W. J., & Blinder, A. (2008). Macroeconomics: principles and policy, Cincinnati, OH: South-Western Publishing.Search in Google Scholar
Beccaria, C. (1797) [1986]. On crimes and punishment, Indianapolis: Hackett.Search in Google Scholar
Becker, G. S. (1968). Crime and punishment: an econometric approach. Journal of Political Economy, 76(1), 169-217.10.1086/259394Search in Google Scholar
Bentham, J. (1788) [1983]. Principles of penal law, in Burton, J.H. (ed.), The Works of Jeremy Bentham, Philadelphia: Lea and Blanchard, 120-134.Search in Google Scholar
Boels, D. (2014). It’s better than stealing: informal street selling in Brussels. International Journal of Sociology and Social Policy, 34(9/10), 670-693.10.1108/IJSSP-04-2013-0049Search in Google Scholar
Cummings, R. G., Martinez-Vazquez, J., McKee, M., & Torgler, B. (2009). Tax morale affects tax compliance: evidence from surveys and an artefactual field experiment. Journal of Economic Behavior and Organization, 70(3), 447-457.10.1016/j.jebo.2008.02.010Search in Google Scholar
Dzhekova, R., & Williams, C. C. (2014). Tackling undeclared work in Bulgaria: a baseline report. Sheffield: GREY Working Paper no. 1, Sheffield University Management School, University of Sheffield.Search in Google Scholar
Dzhekova, R., Franic, J., Mishkov, L., & Williams, C. C. (2014). Tackling the Undeclared Economy in FYR Macedonia, Sheffield: GREY Working Paper no. 3, Sheffield University Management School, University of Sheffield.Search in Google Scholar
European Commission (2007). Stepping up the Fight against Undeclared Work. Brussels: European Commission.Search in Google Scholar
Ferrer-i-Carbonell, A., & Gërxhani, K. (2011). Financial satisfaction and (in)formal sector in a transition country. Social Indicators Research, 102(2), 315–331.10.1007/s11205-010-9684-6Search in Google Scholar
Franic, J., & Williams, C.C. (2014). Undeclared work in Croatia: a baseline assessment, Sheffield: GREY Working Paper no. 2, Sheffield University Management School, University of Sheffield.Search in Google Scholar
Grabiner, L. (2000). The Informal Economy, London: HM Treasury.Search in Google Scholar
Hasseldine, J., & Li, Z. (1999). More tax evasion research required in new millennium. Crime, Law and Social Change, 31(1), 91-104.10.1023/A:1008324726125Search in Google Scholar
Helmke, G., & Levitsky, S. (2004). Informal institutions and comparative politics: a research agenda. Perspectives on Politics, 2, 725-740.10.1017/S1537592704040472Search in Google Scholar
Hodosi, A. (2015). Perceptions of irregular immigrants’ participation in undeclared work in the United Kingdom from a social trust perspective. International Journal of Sociology and Social Policy, 35(5/6), 375-389.10.1108/IJSSP-10-2013-0108Search in Google Scholar
Horodnic, I. A. (2016). Cash wage payments in transition economies: consequences of envelope wages, Berlin: IZA World of Labour.10.15185/izawol.280Search in Google Scholar
ILO (2013). Women and Men in the Informal Economy: statistical picture, 3rd edition. Available at: https://www.ilo.org/global/publications/books/WCMS_626831/lang--en/index.htm (accessed 1 April 2019).Search in Google Scholar
Job, J., Stout, A., & Smith, R. (2007). Culture change in three taxation administrations: from command and control to responsive regulation. Law and Policy, 29(1), 84-101.10.1111/j.1467-9930.2007.00247.xSearch in Google Scholar
Jütting, J., Laiglesia, J. (2009). Employment, poverty reduction and development: what’s new?, in Jütting, J. and Laiglesia, J. (eds.), Is Informal Normal? Towards more and better jobs in developing countries, OECD, Paris, 129-152.Search in Google Scholar
Kirchler, E. (2007). The Economic Psychology of Tax Behaviour, Cambridge: Cambridge University Press.10.1017/CBO9780511628238Search in Google Scholar
McGee, R. W. (2005). The ethics of tax evasion: a survey of international business academics. Paper presented at the 60th International Atlantic Economic Conference, New York, October 6-9.Search in Google Scholar
McKerchar, M., Bloomquist, K., & Pope, J. (2013). Indicators of tax morale: an exploratory study. eJournal of Tax Research, 11(1), 5-22.Search in Google Scholar
Molero, J. C., & Pujol, F. (2012). Walking inside the potential tax evader’s mind: tax morale does matter. Journal of Business Ethics, 105, 151-162.10.1007/s10551-011-0955-1Search in Google Scholar
Murphy, K., & Harris, N. (2007). Shaming, shame and recidivism: a test of re-integrative shaming theory in the white-collar crime context. British Journal of Criminology, 47, 900-917.10.1093/bjc/azm037Search in Google Scholar
Murphy, K. (2005). Regulating more effectively: the relationship between procedural justice, legitimacy and tax non-compliance. Journal of Law and Society, 32(4), 562-589.10.1111/j.1467-6478.2005.00338.xSearch in Google Scholar
Murphy, K. (2008). Enforcing tax compliance: to punish or persuade? Economic Analysis and Policy, 38(1), 113-135.10.1016/S0313-5926(08)50009-9Search in Google Scholar
North, D. C. (1990). Institutions, Institutional Change and Economic Performance, Cambridge: Cambridge University Pres.10.1017/CBO9780511808678Search in Google Scholar
OECD. (2012). Reducing Opportunities for Tax Non-Compliance in the Underground Economy, Paris: OECD.Search in Google Scholar
Richardson, M., & Sawyer, A. (2001). A taxonomy of the tax compliance literature: further findings, problems and prospects. Australian Tax Forum, 16(2), 137-320.Search in Google Scholar
Schmölders, G. (1952). Finanzpsychologie, Finanzarchiv, 13, 1-36.Search in Google Scholar
Schmölders, G. (1960). Das Irrationale in der öffentlichen Finanzwissenschaft, Hamburg: Rowolt.Search in Google Scholar
Schmölders, G. (1962). Volkswirtschaftslehre und Psychologie, Berlin: Reinbek.Search in Google Scholar
Schneider, F., & Enste, D. H. (2013). The Shadow Economy, Cambridge: Cambridge University Press.10.1017/CBO9781139542289Search in Google Scholar
Slemrod, J., Blumenthal, M., & Christian, C. W. (2001). Taxpayer response to an increased probability of audit: evidence from a controlled experiment in Minnesota. Journal of Public Economics, 79, 455-483.10.1016/S0047-2727(99)00107-3Search in Google Scholar
Strümpel, B. (1969). The contribution of survey research to public finance, in Peacock, A.T. (ed.), Quantitative Analysis in Public Finance, New York: Praeger, 12-32.Search in Google Scholar
Thai, M. T. T., & Turkina, E. (2014). Macro-level determinants of formal entrepreneurship versus informal entrepreneurship. Journal of Business Venturing, 29(4), 490-510.10.1016/j.jbusvent.2013.07.005Search in Google Scholar
Torgler, B., & Schneider, F. (2007). Shadow economy, tax morale, governance and institutional quality: a panel analysis, Bonn: IZA Discussion Paper no. 2563, IZA.Search in Google Scholar
Torgler, B. (2007). Tax morale in Central and Eastern European countries, in Hayoz, N. and Hug, S. (eds.), Tax Evasion, Trust and State Capacities: how good is tax morale in Central and Eastern Europe?, Bern: Peter Lang, 155-186.Search in Google Scholar
Torgler, B. (2011). Tax morale and Compliance: review of evidence and case studies for Europe, Washington DC: World Bank Policy Research Working Paper 5922, World Bank.10.1596/1813-9450-5922Search in Google Scholar
Torgler, B. (2012). Tax morale, Eastern Europe and European enlargement. Communist and Post-Communist Studies, 45(1), 11-25.Search in Google Scholar
Torgler, B., & Schneider, F. (2007a). Shadow Economy, Tax Morale, Governance and Institutional Quality: A Panel Analysis, Berlin: IZA Discussion Paper No. 2563; CESifo Working Paper Series No. 1923.10.2139/ssrn.960012Search in Google Scholar
Torgler, B., & Schneider, F. (2007b). What shapes attitudes toward paying taxes? Evidence from multicultural European countries. Social Science Quarterly, 88, 443–470.10.1111/j.1540-6237.2007.00466.xSearch in Google Scholar
Varma, K., & Doob, A. (1998). Deterring economic crimes: the case of tax evasion. Canadian Journal of Criminology, 40, 165-184.10.3138/cjcrim.40.2.165Search in Google Scholar
Webb, J. W., Tihanyi, L., Ireland, R. D., & Sirmon, D. G. (2009). You say illegal, I say legitimate: entrepreneurship in the informal economy. Academy of Management Review, 34(3), 492-510.10.5465/amr.2009.40632826Search in Google Scholar
Williams, C. C. (2014a). Confronting the Shadow Economy: evaluating tax compliance behaviour and policies, Cheltenham: Edward Elgar.Search in Google Scholar
Williams, C. C. (2014b). Out of the Shadows: A classification of economies by the size and character of their informal sector. Work, Employment and Society, 28(5), 735-753.10.1177/0950017013501951Search in Google Scholar
Williams, C. C. (2017). Developing a Holistic Approach for Tackling Undeclared Work, Brussels: European Commission.10.2139/ssrn.2937694Search in Google Scholar
Williams, C. C., & Franic, J. (2016). Explaining participation in the informal economy in post-socialist societies: a study of the asymmetry between formal and informal institutions in Croatia. Journal of Contemporary Central and Eastern Europe, 24(1), 51-65.10.1080/0965156X.2015.1118817Search in Google Scholar
Williams, C. C., & Horodnic, I. A. (2015a). Evaluating the prevalence of the undeclared economy in Central and Eastern Europe: an institutional asymmetry perspective. European Journal of Industrial Relations, 21(4), 389-406.10.1177/0143831X14568835Search in Google Scholar
Williams, C. C., & Horodnic, I. A. (2015b). Who participates in the undeclared economy in South-Eastern Europe? an evaluation of the marginalization thesis. South-Eastern Europe Journal of Economics, 13(2), 157-175.Search in Google Scholar
Williams, C. C., & Horodnic, I. (2015c). Tackling the informal economy in South East Europe: an institutional approach. Journal of South East European and Black Sea Studies, 15(4), 519-539.10.1080/14683857.2015.1056980Search in Google Scholar
Williams, C. C., & Horodnic, I. (2016a). Cross-country variations in the participation of small businesses in the informal economy: an institutional asymmetry perspective. Journal of Small Business and Enterprise Development, 23(1), 3–24.10.1108/JSBED-02-2015-0021Search in Google Scholar
Williams, C. C., & Horodnic, I. (2016b). An institutional theory of the informal economy: some lessons from the United Kingdom. International Journal of Social Economics, 43(7), 722-738.10.1108/IJSE-12-2014-0256Search in Google Scholar
Williams, C. C., & Horodnic, I. A. (2017). Evaluating the illegal employer practice of under-reporting employees’ salaries. British Journal of Industrial Relations, 55(1), 83-111.10.1111/bjir.12179Search in Google Scholar
Williams, C. C., & Kayaoglu, A. (2017). Evaluating the prevalence of employees without written terms of employment in the European Union. Employee Relations, 39(4), 487-50210.1108/ER-10-2016-0189Search in Google Scholar
Williams, C. C., & Padmore, J. (2013a). Evaluating the prevalence and distribution of quasi-formal employment in Europe. Relations Industrielles/Industrial Relations, 68(1), 71-95.10.7202/1014742arSearch in Google Scholar
Williams, C. C., & Padmore, J. (2013b). Envelope wages in the European Union. International Labour Review, 152(3-4), 411-430.10.1111/j.1564-913X.2013.00186.xSearch in Google Scholar
Williams, C. C., & Schneider, F. (2016). Measuring the Global Shadow Economy: the prevalence of informal work and labour, Cheltenham: Edward Elgar.Search in Google Scholar
Williams, C. C., Franic, J., & Dzhekova, R. (2014). Explaining and tackling the undeclared economy in Bulgaria: an institutional asymmetry perspective. The South-East European Journal of Economics and Business, 9(2), 33-45.10.2478/jeb-2014-0008Search in Google Scholar
Williams, C. C., Radevsky, M., & Stefanik, M. (2017). Evaluating the extent and nature of undeclared work in Croatia, Zagreb: Croatian Ministry of Labour and Pensions.10.2139/ssrn.2944950Search in Google Scholar
World Bank (2019). Global Economic Prospects 2019: darkening skies, Washington DC: World Bank.Search in Google Scholar
© 2019 Colin C Williams, published by De Gruyter
This work is licensed under the Creative Commons Attribution 4.0 International License.
