Mission Implausible III: Measuring the Informal Sector in a Transition Economy using Macro Methods1

An easy and popular method for measuring the size of the underground economy is to use macro-data such as money demand or electricity demand to infer what the legitimate economy needs, and then to attribute the remaining consumption to the underground economy. Such inferences rely on the stability of parameters of the money demand and electricity demand equations, or at the very least on knowledge of how these parameters are changing. We argue that the pace of change of these parameters (such as velocity) is too variable in transition economies for the above methods of estimating the size of the underground economy to be applicable. We make our point by using the Czech Republic and other transition country data from the financial and electricity sectors.http://deepblue.lib.umich.edu/bitstream/2027.42/40069/3/wp683.pd

Piecewise affine approximations for functions of bounded variation

BV functions cannot be approximated well by piecewise constant functions, but this work will show that a good approximation is still possible with (countably) piecewise affine functions. In particular, this approximation is area-strictly close to the original function and the $\mathrm{L}^1$-difference between the traces of the original and approximating functions on a substantial part of the mesh can be made arbitrarily small. Necessarily, the mesh needs to be adapted to the singularities of the BV function to be approximated, and consequently, the proof is based on a blow-up argument together with explicit constructions of the mesh. In the case of $\mathrm{W}^{1,1}$-Sobolev functions we establish an optimal $\mathrm{W}^{1,1}$-error estimate for approximation by piecewise affine functions on uniform regular triangulations. The piecewise affine functions are standard quasi-interpolants obtained by mollification and Lagrange interpolation on the nodes of triangulations, and the main new contribution here compared to for instance Cl\'{e}ment (RAIRO Analyse Num\'{e}rique 9 (1975), no.~R-2, 77--84) and Verf\"{u}rth (M2AN Math.~Model.~Numer.~Anal. 33 (1999), no. 4, 695-713) is that our error estimates are in the $\mathrm{W}^{1,1}$-norm rather than merely the $\mathrm{L}^1$-norm.Comment: 14 pages, 1 figur

The Evolution of Tax Evasion in the Czech Republic: A Markov Chain Analysis

We use a dataset of 1062 individuals from the Czech Republic to forecast the evolution of tax evasion in that country. We ask each respondent how intensely (never, sometimes, often) he evaded taxes in 1995, 1999, and 2000, to calculate probabilities the average individual will move between these categories of evasion in any given year. These "trasition" probabilities allow us to predict a rising tide of tax evasion in the next decade. We estimate the reduced form parameters which determine evasion and suggest how government might influence these parameters to prevent the Czech Republic from bogging down in a permanent mire of tax evasion. (JEL Codes : H26, H43, K42, O17)Tax evasion, transition economies, dynamic modelling, Czech Republic

Why People Evade Taxes in the Czech and Slovak Republics: A Tale of Twins

The present paper uses a survey of 1062 Czechs and 524 Slovaks to ask why people evade taxes. We maintain that the Czech and Slovak Republics are “twins” separated at birth and that divergences between these countries since their separation in 1992 can explain divergences in their rates of tax evasion. High Slovak tax rates and lower Czech tax rates seem to explain little of the difference in evasion between the two countries. Rising Czech incomes seems the main reason that Czech Republic evades more taxes. We also look at detailed demographic and psychological reasons for tax evasion. We find that morality is a strong deterrent to evasion.Tax evasion, transition economies, Czech Republic, Slovak Republic

Mission Implausible III: Measuring the Informal Sector in a Transition Economy using Macro Methods1

An easy and popular method for measuring the size of the underground economy is to use macro-data such as money demand or electricity demand to infer what the legitimate economy needs, and then to attribute the remaining consumption to the underground economy. Such inferences rely on the stability of parameters of the money demand and electricity demand equations, or at the very least on knowledge of how these parameters are changing. We argue that the pace of change of these parameters (such as velocity) is too variable in transition economies for the above methods of estimating the size of the underground economy to be applicable. We make our point by using the Czech Republic and other transition country data from the financial and electricity sectors.shadow economy, measureament of tax evasion, transition economies

Quality of Government Services and the Civic Duty to Pay Taxes in the Czech and Slovak Republics, and other Transition Countries

A 2002 survey of 1089 Czechs and 501 Slovaks, as well as a more limited survey of Hungary, and Poland, indicates that an individual may evade taxes in part if he believes he is receiving substandard government services. We suggest that an individual’s evaluation of the quality of government services is not influenced by his need to justify his evasion. Self-reported measures of morality show no correlation with evasion. This suggests that perceptions of government services are not shaped by an individual’s need to justify his evasion. This gives weight to our finding that the perceived quality of government services influences evasion. The less quality of government services an individual reports, the more likely he is to evade taxes. A 20% increase in the perception that government services are of quality would lead to a 5% decrease in the number of frequent tax evaders and a 12% increase in the number who never evade. Governments in transition countries who suffer from weak tax collection apparatus may wish to transmit clear information on the quality of their services in order to cut down on evasion.Tax evasion; quality of government services; transition; Czech Republic; Slovak Republic; Hungary; Poland