In this paper we study the social norms to abstain from cheating on the state via benefit fraud and tax evasion. We interpret these norms (called benefit morale and tax morale) as moral goods, and derive testable hypotheses on whether their demand is determined by prices. Employing a large survey data set from OECD-member countries we provide robust evidence that the demand responds to price pr...

The Size of the Shadow Economies of 145 Countries all over the World: First Results over the Period 1999 to 2003 Using the DYMIMIC approach, estimates of the shadow economy in 145 developing, transition, developed OECD countries, South Pacific islands and still communist countries are presented. The average size of the shadow economy (in percent of official GDP) over 2002/2003 in developing cou...

We present an experimental study on the wasted resources associated with tax evasion. This waste arises from taxpayers and tax authorities, investing costly effort in concealment, respectively detection, of tax evasion. We show that (socially inefficient) efforts depend positively on the prevailing tax rate, but not on the fine which is imposed in case of detected tax evasion. The frequency of ...

We use the occasion of a change in tax policy that raised the tax rate for many of the listed companies in China to examine tax-induced earnings management (TEM) from the perspective of political connections. We find that when the tax rate increased, only those affected firms with politically connected management engaged in TEM. This suggests that, in addition to motivation for managing earning...

According to economists, severe legal sanctions deter violations of the law. According to legal scholars, people may obey law backed by mild sanctions because of norm-activation. We experimentally investigate the effects of mild and severe legal sanctions in the provision of public goods. The results show that severe sanctions almost perfectly deter free-riding. However, people also obey law ba...

This paper investigates whether market competition enhances firms’ incentives to hide profits. We develop a theoretical model of firms’ profit hiding behavior in competitive environments and derive several testable hypotheses. We then test the model using a database that covers more than 20,000 large-and-medium-sized industrial firms in China during the period 1995-2002. Our findings show that ...

A benchmark result in the political economy of taxation is that majority voting over a linear income tax schedule will result in an inefficiently high tax rate whenever the median voter has a below average income. The present paper examines the role of tax avoidance for this welfare assessment. We find that the inefficiency in the voting equilibrium is the lower, the higher the average level of...

In most OECD countries THE policy instrument of choice to prevent people from working in the shadows has been deterrence. While deterrence is well-founded from a theoretical point of view, the empirical evidence on its success is weak: tax policies and state deregulation appear to work much better. The discussion of the recent literature underlines that in addition economic opportunities, the o...