Financial Satisfaction and (in)formal Sector in a Transition Country

This paper examines the relationship between working in the formal or informal sector and self-reported individual financial satisfaction in a country in transition. It does so by allowing for individual heterogeneity in terms of perceived financial insecurity and tax morale. The empirical analysis uses a dataset for Albania, a country in transition. The method applied is the ‘self-administered questionnaire’, which combines personal contacts with written questionnaire. The results indicate that, for most individuals, working in the informal sector has negative effects on their self reported financial satisfaction. For some individuals, however, this effect is positive. The characteristic defining these two groups of individuals is their attitude towards the perceived financial insecurity related to not paying taxes. These findings have important implications, in particular for transition countries with large informal sectors. Given the involuntary participation in the informal sector in these countries, the majority of individuals working in this sector will remain financially dissatisfied as long as they have no other social safety net

What explains the North–South divide in Italian tax compliance? An experimental analysis

This is the author accepted manuscript. The final version is available from Palgrave Macmillan via the DOI in this recordI undertake a comparative study assessing the North–South divide in Italian tax compliance, employing the largest behavioral tax compliance experiment to date. Contrary to a large body of literature, I argue that willingness to pay taxes is constructed within a specific institutional environment and reflects the country’s quality of institutions. To test this hypothesis, I use controlled tax compliance experiments from four laboratories in Capua, Rome, Bologna, and Milan. By employing the experimental method, I am able to hold institutions constant allowing me to isolate cultural variation. Contrary to cultural explanations for tax compliance, when controlling the institutional environment, there is no difference in tax compliance. Furthermore, using social value orientation to compare prosociality, I also find no differences between the two regions. I therefore conclude that individuals’ relationship to their states shapes these behavioral differences in tax compliance.Funds for this research were provided by the European Research Council (Grant Agreement No. 295675 )

Does the sole description of a tax authority affect tax evasion? The impact of described coercive and legitimate power.

Following the classic economic model of tax evasion, taxpayers base their tax decisions on economic determinants, like fine rate and audit probability. Empirical findings on the relationship between economic key determinants and tax evasion are inconsistent and suggest that taxpayers may rather rely on their beliefs about tax authority’s power. Descriptions of the tax authority’s power may affect taxpayers’ beliefs and as such tax evasion. Experiment 1 investigates the impact of fines and beliefs regarding tax authority’s power on tax evasion. Experiments 2-4 are conducted to examine the effect of varying descriptions about a tax authority’s power on participants’ beliefs and respective tax evasion. It is investigated whether tax evasion is influenced by the description of an authority wielding coercive power (Experiment 2), legitimate power (Experiment 3), and coercive and legitimate power combined (Experiment 4). Further, it is examined whether a contrast of the description of power (low to high power; high to low power) impacts tax evasion (Experiments 2-4). Results show that the amount of fine does not impact tax payments, whereas participants’ beliefs regarding tax authority’s power significantly shape compliance decisions. Descriptions of high coercive power as well as high legitimate power affect beliefs about tax authority’s power and positively impact tax honesty. This effect still holds if both qualities of power are applied simultaneously. The contrast of descriptions has little impact on tax evasion. The current study indicates that descriptions of the tax authority, e.g., in information brochures and media reports, have more influence on beliefs and tax payments than information on fine rates. Methodically, these considerations become particularly important when descriptions or vignettes are used besides objective information

Starting-up unregistered and firm performance in Turkey

© 2016 The Author(s) Recent years have seen a questioning of the negative representation of informal sector entrepreneurship and an emergent view that it may offer significant benefits. This paper advances this rethinking by evaluating the relationship between business registration and future firm performance. Until now, the assumption has been that starting-up unregistered is linked to weaker firm performance. Using World Bank Enterprise Survey data on 2494 formal enterprises in Turkey, and controlling for other determinants of firm performance as well as the endogeneity of the registration decision, the finding is that formal enterprises that started-up unregistered and spent longer unregistered have significantly higher subsequent annual sales and productivity growth rates compared with those registered from the outset. This is argued to be because in such weak institutional environments, the advantages of registering from the outset are outweighed by the benefits of deferring business registration and the low risks of detection and punishment. The resultant implication is that there is a need to shift away from the conventional eradication approach based on the negative depiction of informal entrepreneurship as poorly performing, and towards a more facilitating approach that improves the benefits of business registration and tackles the systemic formal institutional deficiencies that lead entrepreneurs to decide to delay the registration of their ventures