Deterrence, tax morale and undeclared work – some lessons - PowerPoint Presentation

Slide1

Deterrence, tax morale and undeclared work – some lessons from Croatia

Colin C Williams, The University of Sheffield

Josip

Franic

, The University of SheffieldSlide2

Overview:

Definition and

terminology

Typology of policy strategies

to

tackle

undeclared economic

activities

Case

study

– Croatia

Discussion

and

conclusion

Slide3

Definition and terminology

No universally adopted definition

No common name to describe the phenomenon

“any paid activities that are lawful as regards their nature but not declared to the public authorities, taking into account differences in the regulatory system of Member States”

Off-the-books work

Undeclared work

Informal Economy

Cash-in-hand

work

Grey

Economy

Irregular Economy

Shadow Economy

Non-official EconomySlide4

Typology of policy strategies

No standard recipe to tackle the phenomenon

Range of possible strategies, which vary according to:

APPROACH

TARGET POPULATION

BEHAVIOURAL PATTERNS

OF INTEREST

Rough categorization of available measure

s

to tackle undeclared work:

INDIRECT CONTROLS

DIRECT CONTROLSSlide5

Direct controls

seek to change cost-benefit ratio of unregistered work

by

trying

to

improve detection or introducing harsher penalties. Main rationale is to deter people from evasion – DETERRENCE MEASURES or

STICKS orb) by

rewarding compliant behaviour (i.e. increasing

benefits of declared work) - CARROTS. Here we distinguish between two categories:

Preventative measures – seek to intercept noncompliance in

the beginningCurative measures – target those already operating in the undeclared economySlide6

Indirect controls

strive to reduce institutional incongruence

Their

goal is to improve the psychological

contract

that exists between the

state and citizens and foster voluntary tax compliance

.The key factor of

interest is ‘tax morale’ – individual’s intrinsic willingness to pay taxes

. How to improve the psychological contract and tax morale?CHANGE THE INFORMAL INSTITUTIONS – tax education, awareness raising campaigns,

normative appealsREFORM THE FORMAL INSTITUTIONS via improvement of procedural justice, procedural fairness and redistributive justiceSlide7

Data and methodology

Data from

1,000 Croatia

ns surveyed

during

2013 as part of

the Special Eurobarometer 402Logistic regression – 2 models (labour supply

side & demand side)Dependent variables : 1

) dummy variable indicating whether a respondent carried out undeclared

work during 12 months preceding the survey2)

dummy variable indicating whether a respondent acquired undeclared goods and/or services during 12 months preceding the

survey Slide8

Logistic regressionSlide9

EXPLANATORY variables - deterrence

Detection

risk

:

Expected

sanctions

:Slide10

EXPLANATORY variables – Tolerance of undeclared activities

Attitudes towards four types of unregistered practices:

Undeclared

work by individual for private household

Undeclared work by firm for private household

Firm hires a worker

on an undeclared basis

Someone partially or completely conceals their incomeFactor

analysis applied to reduce the dimensionality -> a single latent

factor measuring one’s level of tolerance Slide11

Control variablesSlide12

Participation in undeclared work

Purchase of undeclared goods and services

Detection risk (RC: Very small)

- Fairly small

0.609 (0.474)

-0.063 (0.224)

- Fairly high

-0.257 (0.580)

-0.324 (0.267)

- Very high

-0.282 (1.119)

-0.963* (0.415)

Expected sanctions (RC: Tax or social security contributions)

- Tax or social security contributions plus a fine

0.887 (0.525)

0.401 (0.226)

- Prison

1.148 (0.838)

0.205 (0.495)

Tolerance

0.463*** (0.112)

0.156** (0.053)

Female

-1.508*** (0.401)

0.106 (0.181)

Age

-0.025* (0.014)

-0.015* (0.007)

Occupation (RC: Unemployed )

- Self-employed

-0.172 (0.761)

0.795 (0.519)

- Employed

-0.123 (0.491)

0.493 (0.285)

- Inactive (house persons, students, etc.)

-0.986 (0.662)

-0.037 (0.357)

- Retired

-0.605 (0.698)0.419 (0.367)Financial problems (RC: Most of the time)   - From time to time-1.458*** (0.457)0.202 (0.251)- Almost never/never-1.255** (0.444)0.143 (0.248)Urban area -1.691*** (0.409)0.266 (0.205)Region (RC: Zagreb)  - North Croatia-3.611*** (1.125)-0.082 (0.304)- Slavonia-1.227* (0.543)-0.119 (0.296)- Lika and Banovina-2.292* (1.057)-0.635 (0.461)- Istra, Rijeka and Gorski Kotar-0.486 (0.593)-0.299 (0.305)- Dalmatia-1.168* (0.543)0.194 (0.273)Cons1.421 (1.205)-2.070**(0.655)Number of observations1,0001,000Number of imputations 5050Prob > F0.0000.003Area Under ROC0.9020.656

Table

1

Determinants of undeclared work in Croatia, logistic regressionSlide13

Figure 1 Predicted probability of participation in undeclared economy of a ‘representative’ Croatian citizen: by tax

moral

e

and

age

T

he representative

citizen - an

unemployed woman who lives

in an urban area of Slavonia, faces financial problemsfrom time to time, perceives the risk of being

detected as fairly

small and expects

to pay

a financial fine alongside

the tax or social security contributions

due

when

detected participating in the undeclared economy.

ToleranceSlide14

Figure 2 Predicted probability of participation in undeclared work of a ‘fearful’ Croatian prone to undeclared work: by

tax

moral

e

and ageThe

‘fearful

’ citizen – a

self-employed male living in the capital

who regularly struggles to pay his bills

, perceives the risk of being detected as very high and expects

imprisonment in the case of detection.Slide15

Conclusion

Weak

psychological

contract between the

state and its citizens is

a significant

driver of

undeclared practices in

CroatiaNo

significant association between participation

in undeclared

work and deterrence

Weak rule of law

in

Croatia

N

eed

for a change in policy approach –

from direct to indirect controls