Edited by Friedrich Schneider
Chapter 10: Tax Morale, Tax Evasion and the Shadow Economy
Gebhard Kirchgässner 10.1 INTRODUCTION Following a usual distinction, the shadow economy can be divided into three parts: (1) pure tax evasion, that is, legal activities are legally performed but no taxes are paid; (2) the black economy, where legal activities are illegally performed; and (3) criminal, illegal activities.1 Taxes are evaded not only in the first area, but also whenever activities are illegally performed. Thus, activities in the shadow economy are always connected with tax evasion, and factors influencing the latter will also always have an impact on the former. If we put to one side financial psychology which has been all but forgotten today,2 moral factors have scarcely been taken into account when the behaviour of taxpayers has been analysed.3 Following the economic theory of criminal behaviour the extent to which citizens pay or evade taxes depends on a simple cost benefit calculus: the additional income by not paying taxes is compared with the expected punishment, that is, the product of the expected punishment and the probability that this punishment will be executed.4 As many investigations show, this model identifies two important factors, but is unable to explain the behaviour of taxpayers: given the low probability of detection citizens should pay much less tax than they actually do.5 In order to correctly pay their taxes, individuals must have a motivation which includes more than the simple economic calculus; other factors also play an important role. If we still assume that citizens’ behaviour is rational, it has to...
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