DETERMINANTS OF BUSINESS TAX EVASION IN TRANSITION ECONOMIES

ABSTRACT
Tax evasion represents one of the major problems facing transition and developing economies. It imposes several economic costs: it slows down economic growth; it diverts resources to unproductive activities; it provides an incentive for firms to remain small and invisible; and it generates inequity between the evaders and the honest taxpayers.
The aim of this thesis is to investigate the determinants of business tax evasion for transition economies. We do so by adapting the individual theory to the case of businesses; that is by assuming that the behaviour of businesses is similar to the behaviour of individuals, and that the determinants of business tax evasion may be similar, at least qualitatively, to the determinants of tax evasion by individuals or households. More specifically, beyond theoretical and empirical review of the tax evasion literature, this thesis provides three related empirical investigations: a panel investigation of tax evasion at the country level; a pooled-cross section investigation of firm-level behaviour across the transition economies and a cross-section investigation of business tax evasion and tax morale in Kosovo. For the firm-level investigation we use the BEEPS data for the years 1999, 2002 and 2005; and, for the investigation of business tax evasion in Kosovo, we generate primary data by developing a questionnaire and conducting a survey of businesses in Kosovo. Our econometric findings suggest that, first, regardless of the theoretical and previous empirical ambiguity, when it comes to transition economies the relationship between tax rate and tax evasion is positive; second, the macroeconomic environment has only minor effects on business tax evasion, suggesting that the decision to evade or not must depend on other non-economic factors; third, even if a country is performing well in general economic terms, the presence of negative institutional phenomena exert a dominant and immediate influence on the relationship between businesses and government; fourth, business tax morale, as is the case with individuals, has a strong and negative relationship with tax evasion; fifth, moreover, given that the same considerations on morality apply to both individuals and businesses, policies in the individual context apply also to businesses; sixth, lower corruption, higher trust and better treatment of business taxpayers improves significantly both tax morale and tax compliance; and, seventh, because levels of tax evasion vary across firm characteristics, audit strategies should be set accordingly. Finally this thesis provides a set of corresponding policy recommendations intended to reduce either the possibility and/or the inclination to evade.