Problemstatement
Existingstudiessignificantlyfocusedonthelinkbetweenfinancialdevelop menta n d formaleconomicactivities.Levine(2005)groupedfactorsintofivecategoriesthr oughwhichfinancialdevelopmentmighthaveeffectsonrealsectorsoftheeconomy:
( d ) c r e a t i n g p o o l s o f sav in g a n d ( e ) p r o m o t i n g e x c h a n g e G i v e n t h e s e g r o u p s , u n d e r s t a n d i n g t h e p o t e n t i a l channelsthroughwhich financialse ctorcaninfluence realeconomicactivities is importantforanyeconomyregardlessofits economicdevelopmentlevel.
Growth nexus has garnered significant attention in financial development literature, yet limited research exists on the impacts of financial intermediary development on unofficial economic activities or the shadow economy Understanding this relationship is crucial, as the shadow economy poses a considerable challenge in developing countries Studies by Johnson, Kaufmann, and Zoido-Lobaton (1998) and Friedman et al (2000) estimate that shadow economic activities contribute between 10% to 15% of GDP in developed countries and 19% to 46% in developing nations The shadow economy adversely affects growth through two primary mechanisms: it restricts investment opportunities since illegal firms operate in an underground environment lacking necessary market support, and it leads to tax evasion, thereby reducing tax revenues Governments facing fiscal deficits due to diminished tax revenues may struggle to maintain budget discipline or resort to external funding, both of which carry various risks and complications.
Asaresultofshadoweconomy,taxevasionreferstoillegalactivitieswhichaimt o concealtaxableincomefromtaxauthoritiesorincludeexpensewhicharenotallowedto reduce taxamount.Byreportinga smallerincome, higher expense, or inextremecase,
Non-income enterprises may evade taxes to save money, but they risk being caught and facing penalties, including fines The primary reason for tax evasion is information asymmetry, where tax authorities lack sufficient information to uncover illegal activities aimed at reducing tax liabilities Enhancing the financial sector, particularly through measures that accelerate information flow and promote market transparency, could significantly aid in controlling tax evasion.
Betterinformation sharingandbankpenetration are among the targetsoffinanciali n t e r m e d i a r y d e v e l o p m e n t T o g e t h e r w i t h o t h e r f i n a n c i a l f a c t o r s a s w e l l a s macro econ omi c f a c t o r s , t h e i r r o l e i s t o h e l p ( a ) formal b a n k s t o i n c r e a s e t h e i r l o a n secur ity byavoidinginformationasymmetrybetweenl oanownersandloantakersand(b)firmswhichoperatelegallyintheeconomytogetbenefits. Thefactorswerepreviouslyd i s c u s s e d andconfirmedinmanystudiesincludingLoveand Mylenko(2003),Becketal.( 2 0 1 1 ) andBecketal.(2014).
( 2 0 0 7 ) suggestedt h a t b e t t e r a c c e s s t o formalc r e d i t s e r v i c e s h e l p i n c r e a s e formalo p e r a t i n g firms’benefits,whichwouldreducetaxevasion.Moreover,inform ationsharingleadstol owert r a ns a c t i o n c o s t s an d i m p r o v e s c re d i t e f f i c i e n c y byen hancingc red it a v a i l a b i l i t y ( B r o w n etal.,2009)andreducesbankcorruptioninl ending(Barthetal.,2009).Theseeviden cesb o o s t b e n e f i t s o f formalfirms,t h u s , l o w e r motivationst o e v a d e t a x o f t h e informalgroup.
Second,taxevasioncouldaswellappearundertheshapeof“cookingthebook”.I n f inancialsystemswhereinformationsharingandbankpenetrationarewellimproved,firm st h a t m i s r e p o r t t h e i r r e v e n u e s w o u l d h a v e moreo b s t a c l e s inb o r r o w i n g
3 m m e t r y , a n d t h e n l e s s l i k e l y t o all ocat e resources tomisreportedfirms.A s s u c h , t he o p p o r t u n i t y costsof e v a de t ax is higheri n c o u n t r i e s w h i c h h a v e e n h a n c e d informations h a r i n g a n d h i g h l e v e l o f b a n k p e n e t r a t i o n (Becketal.,2014).
2014ofWorldBankEnterpriseSurveyshavenotbeensignificantlyusedinthisa r e a ofst udies.Instead, previousstudies ontax evasionappeartouse national- leveldataestimatedf r o m i n t e r n a t i o n a l d a t a b a s e l i k e WorldB a n k D e v e l o p m e n t I n d i c a t o r s (Cobham,2 0 0 5 ) o r f i r m - l e v e l d a t a fromWorldB a n k E n t e r p r i s e S u r v e y s 2 0 0 2 –
2 0 0 5 d a t a b a s e (Becketal.,2014).TheWorldBankEnterpriseSurveysisafirm- leveldatasetw h i ch c o v e r s m a n y a s pe c t s o f firms’o p e r a t i o n s a n d i s c o n d u c t e d by
2005,thedatasetiscollectedandgroupedintoonedataset.Thed at aset isgroupedagainin2 00
2014andst an dar di zed forcomparability ofr esu lt s T h e necessityofusingthisupdat ed datafrom2006- 2014for theresearch issueisoneofthekeyobjectivesofthisempiricalstudy.Moreover, thecontentsandstr ucturesofthes u r v e y changethroughtime,whichinfactcreatesmissingmainvariab lestodeterminetaxevasionandraisesthedemandtodiscoveranothermeasurementmethod.
Developingcountries includingVietnamdonot havean advanced taxsystemwithhightaxrevenueandhighextentofcoverage.Lackoftaxrevenueisamajorpro blemasgovernmentcouldbe deepin debt whilefindingthewayto financenationalexpendituresa t allgovernmentlevels.Theneedofanindependentresearchtoprovi dethegovernmentswith anadditionalempiricalevidenceinrelationtotheapproachinwhicht axevasionina countrycanbereducedis anurgentquestionatthispointintime.DevelopingcountriesincludingVietnamalsohavetoack nowledgethedifferencesinorganizationalissues,taxlawandotheraspectsbetweendevelop inganddevelopedeconomiessothatchangescanb e madeaccordinglyintheprocessofeconomic transformationanddevelopment.
RecentlyinAprilof2016,ahugeleakofconfidentialdocumentsabouttax,knownas“Pana mapapers”,happens andrevealsalotofinformation abouthowtherichhidet h e i r assetstoevadetaxunderonePanamanianlawfirmMossackFonseca.The consequencesspreadaroundtheworldinmonths,whichcreatedaglobalscandal.This e v e n t a lso p u t a q u e s t i o n marko n h o w g o v e r n m e n t s r e a l l y manage t a x evasion.T h i s st u d y isconductedinresponsetothisrecenteventanditisexpectedthatfindingsf romt h i s empiricalstudywillencouragemoreresearchinrelationtotaxevasioninth enearfuture,inparticularforVietnam.
Researchobjectives
Thisstudyaimstoevaluatethepotentialcontributionofinformationsharingand b a n k penetrationinsolvingtaxevasionproblemindevelopingcountries.Onthegroundo fe mpiricalfindings,policy implicationsaredrawn.Usingupdateddataset–2006- 2014i n WorldBankEnterpriseSurveysandotheradditionaldatasource,thefollowin gthrees p e c i f i c objectivesareexpectedtobeachievedinthisstudy:
First,establishing ane wta xev asi on in de xus in g modelap pr oa ch, bywhi chi n f l u e n t i a l factors are combinedintoa singleindexwhich isconsider edasa r e p r e s e n t a t i v e fortaxevasion.
Researchquestions
Third,howdotypicalcharacteristicsoffirmssuchastheirsize,togetherwitht h ei r location,affecttherelationshipbetweeninformationsharing- bankpenetrationandtaxevasion?
Contributionofthe thesis
First,a n e w i n d e x t o measuret a x e v a s i o n ist o b e c o n s t r u c t e d i n t h i s s t u d y u s i n g datafromWorldBankEnterprisesSurvey.Asinmanypreviouspaper srelatingt o t a x e v a s i o n ( i n c l u d i n g B e c k e t a l , 2 0 1 4 ) , t a x e v a s i o n isd e a l t byusing answer codedc241 1i n WorldBank EnterpriseSurveyfrom2002– 2005d a t a s e t A n a l t e r n a t i v e measurei s t o c a l c u l a t e t a x e v a s i o n r a t i o u s i n g t h e differencebetween1,themaximumvalueandtheanswe redfigurereportedinquestionc 2 4 1 U n f o r t u n a t e l y , t h i s q u e s t i o n i s n o t a v a i l a b l e i n s t a n d a r d i z e d surveysfrom2 0 0 6 , e x c e p t f o r e x i s t i n g asc o u n t r y s p e c i f i c v a r i a b l e i n q u e s t i o n n a i r e ofsomecountrieslik eYemen.Thisraisesthedemandofanewmeasurement oftaxevasionfrom2006o nwards.
Second,acomprehensiverelationshipbetweenproxyoffinancialintermediaryd e v e l o p m e n t ands h a d ow economy/ t ax evasionvariables usingsta nda rd ize d dataofWorldBankEnterpriseS urveyfrom2006-
Third,theeffectsoffirmsize andlocationtotherelationshipbetweenfinanciald e v e l o p m e n t s w h i c h a r e i n f o r m a t i o n s h a r i n g a n d b a n k p e n e t r a t i o n , a n d taxevasionisexamine dandquantifiedinthisempiricalstudy.
1 Answer codedc241isforquestion41inBusiness-GovernmentrelationspartofWorldBankEnterprisesurveyin2 0 0 2 - 2005d a t a s e t : “ R e c o g n i z i n g t h e d i f f i c u l t i e s manye n t e r p r i s e s faceinfullyc o m p l y i n g witht a x e s andregulations,whatpercentageoftotalsaleswouldyouestimatethetypicalestablishmentinyourareaofactivi tyr e p o r t s fortaxpurposes?”.Theanswerispresentedinpercentageformat.
Structureofthethesis
- Chapter2 r e v i e w s r e l e v a n t literaturei n c l u d i n g t h e o r e t i c a l b a c k g r o u n d s a n d p r e v i o u s empiricalstudies.First,thestudyfocusesonexpla iningtaxevasionb a s e d on academican d measurableap pr oa ches S e c o n d , i nf or ma ti on sharing a n d bankpenetrationisdefined,investigatedtode monstratetheirrolestotaxevasionissue.
- Chapter3presentsthemethodologyanddatatobeadoptedinthisstudy.Thissecti onpresentsh o w n e w T E I isd e v e l o p e d a n d u se d i nr eve al in g t h e r e l a t i o n s h i p b e t w e e n f i n a n c i a l d e v e l o p m e n t s , w i t h informations h a r i n g a n d b a n k penetration as r e p r e s e n t a t i v e s , and ta x e v a s i o n Th en, s o ur ce o f da t a is definedandexplainedaboutthesuitability.Finally,initialanalytic sofdataandresultsoftaxevasionindexcalculationarealsopresented.
- Chapter4p r e s e n t s an d d i s c us s es t h e result o f empiricalanalysis T wo r e g r e s s i o n s areconductedwiththemainfindingsusedtoanswertworesearchq uestions.Additionaldiscussionandcomparisonwithpreviousempirical studiesarethenpresented.
Explaining taxevasion
Taxevasionapproach
000).First,directapproachesincludevoluntarysurveys,taxauditingandothercom pliancemethods.Forexample,theU.S.InternalRevenueServices(IRS)implementsa detailau ditprogramfrom1965to1988onastratifiedrandomsampleofnearly
50.000individualtaxreturnsevery3yearstodetectthetaxgap.Theresultoftheauditisfirstu s e d togeneratingtheactualincomeofanindividual.Thenbycomparingwithreportedincomef romthatperson,weyieldthetaxgap.Itcouldbeconsideredasaproxyfortaxe v a s i o n
T h e d a t a c a n b e di st o r t ed orbiasedbasedonattitudesandwillingnesstoanswerofre spondents,asmosto f themhesitatetorevealthesensitiveinformation.Qualityofthismet hodalsodependsonhowthequestionnaireareconstructedandimplemented.
Second,indirectapproaches,knownasindicatorapproaches,mostly usemacroeconomic a n d o t h e r i n d i c a t o r s t o e s t i m a t e t h e g r o w t h o f t a x e v a s i o n i s s u e o v e r time.Theylookintotracesoftaxevasioninmeasurableindicators,giveatryto measuret h e issueviaotherthings.Thatisthereasonwhythismethodiscalled“indirect”. Someindicatorsusedi n t h i s a p p r o a c h t o measureu n o f f i c i a l s e c t o r s i n c l u d e d i f f e r e n c e ofm e a s u r e m e n t betweenexpenditureandincomeapproachofgrossnati onalproducts(GNP);discrepancybetweenofficialandactuallaborforce;differenceovertimebe tweenvolumeoftransactionsandofficialGNP.
Anotherwaytoinvestigatetaxevasionindirectlyistolookintotransactionswhichusemone y,w i t h a n a s s u m p t i o n t h a t a t r u e l e v e l o f economica c t i v i t y c o u l d befullyd e s c r i b e d byF i s h e r i a n relationship betweenmoneya n d itsvelocity.Byc o m p a r i n g estimatedlevelofeconomicactivitya ndofficialnationalaccounts,wecanget“shadoweconomy”.Shadoweconomycouldbeused asaproxytomeasuretaxevasion.
Althoughallindirectmethodscouldbeusedtomeasuretaxevasionandthedataisav a i l a b l e inmany sources,eveninlongperiod,eachmethodhasitsownlimitations 2a n d m a y notbeabletoappl ytoeverycase.Oneofthemostimportantreasonisthatallofindirectmethodonlyuseone indicatortorepresentfor effectofshadoweconomyand/ort a x e v a s i o n ; a n d somem o n e t a r y ap p r o a c h es c o n s i d e r onlyt a x b u r d e n a s c a u s e o f t h e issues.However,shadoweconomyand taxevasionarecreatedbymanycausesandresulti n manyeffectsinvariousaspects:production,labor andmoneymarkets.
Third,m od ela pp ro ach was fi rs t introducedbyFreyandWeck(1983a, b), Fre ya n d Weck-Hannemann(1984)whentheycombinedtwenty- fourcountriesofOECDinap a n e l d a t a s e t t o d e t e r m i n e t h e s i z e o f t h e s h a d o w e c o n o m y B a s e d o n s t a t i s t i c t h e o r y , s h a d o w e c o n o m y o r t a x e v a s i o n i s c o n s i d e r e d a s u n o b s e r v e d v a r i a b l e s , a n d c o u l d beestimatedviaitscausesandeffects,whic haremeasurable.TheDYMIMIC(orDynamicMultipleIndicators–
MultipleCauses)appearstof u l l y c o v e r t h e meaningo f modela p p r o a c h andsoonproves itsadvantagebyflexibilityandprecision.
Nevertheless,t h e r e a r e a l s o d i s a d v a n t a g e s o f mistakesi n m e a s u r e m e n t , w r o n g ch o i c e ofvariables, all ofwhichcan leadto thebiasness oftheresults.T h i s p a p e r adoptsthemodela p p r o a c h t o g i v e s u i t a b l e m e a s u r e m e n t f o r t a x e v a s i o n, a n d t o e x a m i n e t h e r el atio nshi p betweentaxevasionandinformationsharingaswellasban kpenetration.
Taxevasionframework
2 Fordetailreview,seeSchneider&Enste(2000). researchesindiscoveringtaxevasionissue.Ingeneral,theanalyticalframeworkshows thatataxcompliancedecisionismadebymaximizingautilityfunction.Theyviewedtaxe v a s i o n a s a gamblebyw h i c h a p e r s o n w e i g h s t h e f i n a n c i a l b e n e f i t bys u c c e s s f u l l y e v a d i n g t h e t a x a g a i n s t t h e c o n s e q u e n c e s ofb e i n g d e t e c t e d a n d p u n i s h e d t o d e c i d e whetherheorshewillplay.Theindividualwouldchoosetopa ytaxduetothefearofb e i n g c a u g h t guiltya n d p u n i s h e d Ast h e i r f e a r d e p e n d s ont h e p r o b a b i l i t y o f b e i n g checked,whichisauditrateandtheamounttheywouldha vetopayperdollartheyhide,which isfinerate,modelappeartobetheusefultoinvestigatetheissue.
Toclearlyillustratetheissue,wec o u l d considerthean al yt ic ideao f Alling hama n d Sandmo(1972).Forexample,anindividualhasafixedamountofincomeI.Hecouldd e c i d e byhimselftoreportallofhisincometotaxauthoritiesorhidesomepartsofit.Wethe nassumehe wouldchoose tohideXdollars(0 ≤X≤I).Withtaxrate oftandfinerateoff,incasehegetscaughthidinghisincome,hehastopayfulltaxandaddi tional fineduetohistaxnoncompliancebehavior.Hisincomebecomes𝐼 �and iscalculatedas below:
Incasehesuccessfullywinsthis“gamble”,hewouldsaveanamountoftaxdueto hisunderreportedincome.Hisincomeis𝐼 �a n d iscalculatedasbelow:
𝐼 �= 𝐼(1−𝑡)+𝑋𝑡 Whetherh e w o u l d r e c e i v e𝐼 �o r 𝐼 �all d e p e n d s o n a f i x e d p r o b a b i l i t y ofb e i n g checked– audit ratep.Nowwe assumethei nd iv id ua l utility functionisanincreasing functionofnetincome.Thismeansthatifhisnetincomeishigh,hegetsmorebenefitsa n dvi ceversa.Hisutilityincomeintaxcompliancecasewouldbe:
Besidenetincome,AllinghamandSandmoalsomentionedreputationasanotherv a r i a b l e foranalysis Theyarguedthatthere mus t bem or e thani n c o m e th at taxpa yerwould lostfortheirtaxnoncompliance,ortheremustbemorethanonevariableinutilityfunction.For ageneralterm,theychoosereputationtorepresentfortheseotherfactors.
Theutilityfunction becomestwo variables function�(𝐼,𝑟),wherer standsforr e p u t a t i o n variable.
This approachshows thattaxcomplianceonlydependsonauditrateandfinerate.P e o p l e a r e morel i k e l y tocompl yt a x r e g u l a t i o n i f a u d i t r a t e a n d / o r f i n e r a t e i s h i g h , whichc r e a t e s h i g h p r o b a b i l i t y o f d e t e c t i o n a n d h e a v y p u n i s h m e n t I n A l l i n g h a m a n d Sandmo’scase,notonlynetincomebutreputationcou ldbeconsideredaspunishmentifa personisaccusedforhistaxnoncompliance.Thereis alsoanumberofextensionsoft h is “ e c o n o m i c s -of- crime”a p p r o a c h ( A l m , 2 0 1 2 ) , b u t t h e b a s i c i d e a a b o u t e c o n o m i c conseq uences isretained.Theideaisconfirmedonceagain:peoplepaytaxonlybecauseo fthefearofb eingdetectedandpunished.
Tax evasion is a complex issue that extends beyond mere detection and penalties Research by Torgler (2011) and Alm (2012) indicates that the proportion of tax returns audited by authorities is relatively low across most countries, regardless of their level of development Limited governmental resources hinder the ability to conduct thorough audits, and penalties for tax evasion often do not exceed the amount evaded, resulting in a low fine rate This financial dynamic suggests a high level of tax evasion, as rational citizens may choose to conceal income due to the significant potential benefits of such illegal behavior Governments cannot rely solely on audit rates and tax rates, which are generally low, to ensure tax compliance In reality, compliance levels vary across regions and tend to be lower than what tax evasion theory predicts (Alm, 2012) The original models fail to account for this discrepancy, indicating that additional factors, beyond fear of penalties, influence tax compliance This raises questions about the differing levels of tax compliance among citizens in various countries.
Anotherins ens ib le is s u e is t ha tt h e b as i c m o d e l o f t a x ev a s i o n o f t e ns u g g e s t s a higherandhighertaxratebecauseitisbelievedtobetteroffthesituationviaincreasi ngt h e punishmentoftaxevasion,regardlessofthefinerate.However,theoryprov esthatsubstitutioneffectofhightaxrateactuallyreducesthereportedincomeduetoincreasing b e n e f i t ofillegalbehaviors.Italsohasincomeeffectwhichdecreasestheattractiven esso f c h e a t i n g incaseoflowincome.Yitzhaki(1974)has pointedoutfromhisresearchthatgovernmentinmostcountries actuallyusedfineratetoremovesubstitutioneffectofhightaxrate,thenincomeeffectwouldrai sethecompliancelevel,nottoincreaseashighaspossible.
Becauseoftwomainreasonsabove,thebasicmodelofAllinghamandSandm o( 19 7 2 ) couldnotbecomethebestmodeltodescriberealsituationdespiteitssimpl icityan d elegant.Butbasedonthispioneeranalysis,researchers foundoutaninstr uctiontoinvestigatethecomplicatedtaxevasionissue.
Althoughthebasicmodelisconcludedasnottobethebestmodeltoinvestigatet h e t axevasionissue,manyextensionsarederivedfromthismodel 3 Theymostlyfocuso n add ingmorevariablestotheoriginalmodeltoincreaseitscomplexityandmorelikelyt o matchrea ls i t u a t i o n Some o f t h e m areex pa nd in g i n d i v i d u a l ch oi ces, a d d i n g alternativetax,re wardinghonesttaxpayersorevensettingupamodelforgovernmenttoc h o o s e whichcompa nytoaudit 4All ofextensions arenecessaryandcontribute tothemaintheory.H o w e v e r , t h e y d i d n o t s o l v e t h e p r o b l e m o f h i g h t a x r a t e – compliancer e l a t i o n s h i p
Slemrod(2007)introducedanenhancementoforiginaltaxevasionbyAllinghama n d S a n d m o T h e a u t h o r madet h e i d e a g o f u r t h e r byanalyzingt a x e v a s i o n c h o i c e o f businesses i n s t e a d o f i n d i v i d u a l t a x d e c i s i o n H e a r g u e d t h a t l a r g e p u b l i c f i r m s a r e expectedtokeepneutraltaxattitudes,notriskadverselikein dividualorsmallfirms.Inaddition,inlargepubliccompanies,it’snotthestockholderbutthefi nancialmanagerora n o t h e r authorizedpersontodefinethereportedincome.Tobalan cetheincomeincentivesbetweenstockholdersandtaxdecisionmakers,firmshavetoma kesurethatb e n e f i t s ofdecisionmakersshouldtieupwithcooperateprofit,whichissour ceofstockh o l d e r s ’ income.
Some researchers have adopted a behavioral economics approach to tax evasion by incorporating psychological factors into their models This innovative method allows for the analysis of both individual and group decision-making processes However, challenges arise in measuring social science variables, as individuals may react differently to tax-related events, and their risk attitudes can fluctuate over time The quality of survey responses is crucial, yet standard measurements in social sciences are often lacking Theoretically, this approach challenges the traditional tax rate-compliance relationship, suggesting that a behavioral analysis could yield more realistic results, provided that high-quality data is available.
Empiricalevidence
Overtheyears,attemptshavebeenmadetoverifytheresultofthebasicmodel.M o s t ofresearchesconcentrateontwomainparameters:theenforcementintensity– auditr a t e a n d l e v e l o f t a x r a t e H o w e v e r , e m p i r i c a l r e s u l t s f a i l e d t o l o o k f o r a methodtomeasuret h e l e v e l o f t a x n o n c o m p l i a n c e B e c a u s e o f t h e c o m p l e x i t y o f t a x e v a s i o n , suitablemethodishardtofindoutaswellaswouldhavetofa cealotofarguments.Thisd i f f i c u l t y couldnotpreventresearcherstrytofindawaytomeas uretaxevasion,useallk i n d ofdatathattheyhavetodealwiththeissue.
Research indicates a complex relationship between tax rates and compliance, with higher tax rates often correlating with lower compliance levels (Clotfelter, 1983; Crane and Nourzad, 1992) However, Feinstein (1991) identified a negative relationship between tax noncompliance and marginal tax rates Witte and Woodbury (1985) and Dubin, Graetz, and Wilde (1990) found that while audit rates positively influence reported income, this effect diminishes; a 10% increase in audit rates may raise reported income by only 1-2% This suggests a non-linear compliance function, indicating a maximum level of audit effectiveness beyond which further efforts yield diminishing returns Additionally, tax amnesty programs appear to have limited impact on compliance, generating only a small increase in tax revenues (Fisher, Goddeeris, and Young, 1989) Other studies suggest that international information sharing could enhance compliance, while strategic audit selection might lead to revenue increases, though these strategies may also face endogeneity challenges (Feinstein, 1991; Alm, Bahl, and Murray, 1993; Johannesen, 2014).
Fielde x p e r i m e n t i s a n o t h e r s o u r c e o f e v i d e n c e w h i c h r e s e a r c h e r s c o u l d f i n d Whilet h e o r i e s a n d a n a l y s e s o f t e n seemt o bes o c o m p a c t o r soc o m p l i c a t e d , f i e l d experimentmethodallowsoccupyingdata inasimplermanner.Datacollectorsgetthei n f o r m a t i o n directlyfromthepartici pants,bywhichtheywouldhaveamicro- datawithindividuallevel.Thedataisthenreadyforeconomicoreconometricanalysis.How ever,t h i s k i n d o f r e s e a r c h d e p e n d s o n q u a l i t y o f r e s p o n s e s , w h i c h i s a f f e c t e d bya l o t o f individualfactors.Therefore,w e alwayshavet o checkanswer’sq u a l i t y bysurveyd e s i g n , choosesuitableparticipantsorguaranteeeducationlevelofsurveyors.
Thebasicideasofcomplianceexperimentsarenearlythesame.Participantshavet o c hooseanincomelevel,andtheywillget(orearn)thatamountofmoney.Thentheyh a v e t o d
14 e c i d e h o w muchi n c o m e t o r e p o r t Onlyr e p o r t e d i n c o m e i s s u b j e c t t o t a x , p a r t i c i p a n t s donothavetopay taxfortheirunderreportedincome.Theyarealsowarned
14 abouttheprobabilityofbeingaudited.Incasetheysuccessfullyhidetheirincome,theysa vemoney.O t h e r w i s e , theyhavet opayadditionalfine fo rc hea ti ng The exp er im en t r e p e a t s anumberofroundswithdifferentscenarios.Changesinscenariosincludeau ditr at e , taxrate,finerateandothertypesofinstitution.Aftertheprocess,participantswouldr ec eiv e moneyaccordingtotheirperformancesintheexperiment.
Fieldex p e r i m e n t h a s c o v e r e d a l o t o f assumptionsa n d c o n d i t i o n s , a l l o w s re searcherstolookintotaxevasionwithoutspendingtoomuchtimeonwaitingforano f f i c i a l d a t a b a s e R e s u l t s f r o m t h i s methoda l s o h a v e c r i t i c a l f i n d i n g s
Higher tax rates are linked to lower tax compliance, while increased audit rates have a slight but positive effect on reported income Experiments indicate that participants tend to overemphasize enforcement intensity, diverging from the traditional utility model proposed by Allingham and Sandmo (1972) Additionally, compliance increases with a positive shift in attitudes driven by higher fine rates and the disclosure of noncompliance When governments offer group or individual rewards, compliance is further encouraged and tends to rise Various audit-related issues, such as audit productivity, selection methods, and collective decision rules, are also under discussion For a comprehensive review of these topics, refer to Torgler (2007) and Alm (2012).
Although experimental methods have advantages in research, they require strict standards to ensure a qualified and applicable data set One issue arises from the repeated design of experiments or neutral instructions, which often reflect early research conducted before the establishment of international standards for experimental methods Additionally, some results lack realism due to the reliance on assumptions without incorporating real-world parameters and values Another challenge is the use of unsuitable participants; finding a large enough sample to represent a specific group or country can be difficult and time-consuming, leading to the inclusion of individuals who may not meet the necessary criteria, such as those who have never paid taxes.
15 kestudentsare selectedasalternatives,whichreducescriticallyt h e qualityofd a t a andexper iments.Finally,successofexperimentdependsonattitudeofparticipantstowardstheissu eand
15 theenvironmenttheyarein.Forexample,apersonwouldthinkthatheisinanexperimentall aboratory,t h e n j u s t b e n i c e , o t h e r w i s e p e o p l e w o u l d c o n s i d e r h i m asa c h e a t e r
Determinantsoftaxevasion
Wes t a r t f r o m academicd e f i n i t i o n s f o r s h a d o w e c o n o m y W h i l e t h e r e a r e nog e n e r a l a n d e x h a u s t i v e d e f i n i t i o n a b o u t s h a d o w e c o n o m y d u e t o i t s c h a r a c t e r i s t i c s o f mu lt i- d im ensi on andextent,researchersmainlyu s e thesefourbelowdefinitionstoe x p l o r e the problem(MinistryofFinanceofBulgaria,2016).
Fiscaldefinition:itconfinestheinformalsectortoactivitieswhichcontravenetaxr e g u l a t i o n s andfailtobereportedbyfinancialauthorities I t includesbut notis limitedtothehidingofsalesbyacompanyfromthefiscalauthorities,thefalse b o o k k e e p i n g , orthesaleofundervaluedrealestate.Alllegaloperatedwithf alseb o o k k ee p i n g andillegalfirmsarecoveredinthisdefinition.Asaresult,thisvie wc o n s i d e r s taxevasionasacriticalfactorthroughwhichshadoweconomy canbemeasured.
Marketdefinition:itfocusesonthedifferencebetweenpayableandnon- payableservices.Thisscopepaysattentiontounregisteredandundeclaredlaborsoffirms toevadeadditionalpayments.
Legald e f i n i t i o n:i t e n c o m p a s s e s a l l a c t i v i t i e s co n d u c t e d i n co n t r a v e n t i o n o f t h e la w Thisperspectiveconcentratesontradeofstolengoods,drugs,corrupti onandmo neylaundering.
Statisticaldefinition:itdiscernsthoseactivitieswhichshouldbereportedino f f i c i a l st atisticsbuttheyarenot.Thefinaldefinitiontargetshiddenresourcesofinformalf i r m s w h i c h s t a t i s t i c a l r e p o r t s c a n n o t h a v e d a t a o f I t a l s o c o v e r s t h e r e s o u r c e s ofofficialfirmswhichareinlackofrelateddata.
Basedo n t h e a v a i l a b i l i t y o f d a t a a n d s c o p e o f t h i s p a p e r , f i s c a l d e f i n i t i o n o f shadoweconomyisadopted.Taxevasionisconsideredtoberepres entativeofsh ad ow economy,andinfluentialfactorsofshadoweconomyc o u l d bedeterminantsoftaxe v a s i o n E l a ( 2 0 1 3 ) s u p p o r t s t h i s a r g u m e n t byd e s c r i b i n g s h a d o w e c o n o m y a n d t a x r e l a t i o n s h i p asa“feedandstrengthen”interaction.Heavytaxburdensincr easetendencyf o r firmstobe operatingintheinformalsector, andviceversa, taxno n- complianceofinformalpartbooststaxdutiesofformalfirmstomeetgovernmenttaxrevenuetarge t.
SchneiderandEnste(2000)pointedoutfivereasonswhyshadoweconomiesexistan din creaseinsize.SchneiderandBuehn(2013)thenimprovedtherelationshipbyre- categorizingt h e f a c t o r s a n d a d d i n g t h r e e remarkablep o i n t s S i x i n f l u e n c e s a r e summarizedbelowasthemostimportantdeterminantsofshadoweconomy:
(i)taxands o c i a l s e c u r i t y c o n t r i b u t i o n b u r d e n s ; ( i i ) r e g u l a t i o n s ; ( i i i ) p u b l i c s e c t o r s e r v i c e s ; ( i v ) q u a l i t y ofinstitutions;(v) taxmorale;and(vi)deterrence 5Each ofthesedeterminantsisd i s c u s s e d indetailinturnbelow.
High tax and social security contribution burdens can distort the labor market by encouraging a preference for the shadow economy As the overall tax burden increases, a higher percentage of firms may choose to operate unofficially to avoid taxation This trend is understandable, as businesses that participate in the legal economy face tax obligations that can be evaded by opting for the informal sector.
Second,regulations,especiallyinlaborbenefitsaswellastradebarriersalsoplaya n i mportantroleinthe decisionof beinginvisible.Numberof licensesneededtooperatea s p e c i f i c b u s i n e s s i s o f t e n i n u s e t o m e a s u r e r e g u l a t i o n i n t e n s i t y A s l a b o r c o s t s r i s e togetherwithintensityoflaw,firmstendtoworkinshadow economytoevadeadditionalpaymentownedbythegovernment.
Third,acircleofinfluenceoccursrelatedto public sector services.Ifparticipationrateoffirmsinshadoweconomy ishighinacountry,taxrevenu esofthe governmentd e c r e a s e , thenpublicgoodsandservices deteriorate Toca tchupwithgovernmenttaxr ev en ue targetandtofulfillnationalexpenditureintha tcase,taxratesareforcedtobe
5 SeeSchneiderandBuehn(2013)fordetailedreferencesofeachfactor. highdespitelowqualityofpublicgoodsandservices.Asaresult,evenstrongerincentiveso ffirmstojoinshadoweconomy.Smallers h a d o w e c o n o m y t h u s e x i s t s i n c o u n t r i e s whichhavehighertaxrevenuesbutlowertaxrates,fewerregulationsandlessb r i b e r y (Joh nson,Kaufmann,andZoido-Lobatón,1998).
Fourth,q u a l i t y o f i n s t i t u t i o n s i s a l s o a n i m p o r t a n t f a c t o r w h i c h m a y d e t e r m i n e s h a d o w economyevenstrongerthantaxandsocialsecuritycontributionbu rdens.Goodinstitutionsassurepropertyrightsandenforceabilityoflawsandregulations.Aco untryc h a r a c t e r i z e d byw e l l - o r g a n i z e d i n s t i t u t i o n s t e n d s t o h a v e s m a l l e r informalp a r t int h e economy.I n a d d i t i o n , t h e r e e x i s t s a c e r t a i n l e v e l o f t a x a t i o n i n w h i c h t a x p o l i c y i s considered a s e f f i c i e n t I n reality,formalfirmsb e n e f i t f r o m h i g h l e v e l o f produc tivep u b l i c goodsandservices,andlosswithtax,whileunofficialonesdotheopposite Theappropriateleveloftaxationwouldminimizetheunofficialpartbyenhancingthequalityo f productivepublicgoodsandservicesandbenefitlegalfirms.
Tax morale significantly influences the size of the shadow economy, as it reflects the indirect effects of public goods and services Taxpayers expect quality public services in exchange for their taxes; when these services are lacking, it can damage their trust and willingness to comply Just as in trade, the absence of equivalent value leads to a breakdown in the exchange relationship Additionally, fostering appropriate social behaviors between tax authorities and taxpayers can enhance tax morale A partnership approach is more beneficial than a hierarchical one, encouraging taxpayers to adhere more closely to tax obligations and regulations.
Sixth,deterrence,whichindicates finesandpunishments iffirmsarefound illegal,i s mentioned.Empiricalstudieshave“thetraditionaleconomictheoryoftaxnon- compliance”toexplainthemechanism,butlittleevidencesareannounced.Thisisduetotheunav ailabilityofdata,andmixedpreviouseconometricresults.
Bya p p l y i n g a b o v e s i x f a c t o r s w h i l e c o m b i n i n g t a x moralea n d d e t e r r e n c e i n a moreg e n e r a l c a t e g o r y : t a x c o m p l i a n c e , w e s u g g e s t f i v e d e t e r m i n a n t c a t e g o r i e s o f t a x e v a s i o n including (i ) taxandsocialsecurity contribution bur dens;(ii)regulations;(iii) publicsectorservices;
Connectionwithinformationsharingandbankpenetration
Informationsharingandbankpenetrationinfinancialsystem
Informationsharinginfinancialdevelopmentindicatestheexchangeindatab e t w e e n financialorganizations,mainlyfocusesoncreditinformation.Sharedinformatio ni s c r i t i c a l i n c a s e o f d e a l i n g w i t h firmsw h i c h d o b u s i n e s s e s w i t h m a n y f i n a n c i a l organizations.Creditinformationsharingalsohelpsincreditgrantingp rocessf o r o p a q u e firmsa n d h o u s e h o l d s byr e d u c i n g i n f o r m a t i o n a s y m m e t r y vi a p r o v i s i o n o f c r e d i t h is t o r y I n g e n e r a l , a f i n a n c i a l s y s t e m w h ic h h a s h i g h l e v e l i n f o r m a t i o n s h a r i n g mayr e d u c e c o s t s a n d e f f o r t s t o i d e n t i f y r i s k a s w e l l a s b e t t e r o f f i t s o p e r a t i o n a l r i s k m a n a g e m e n t thankstotransparentenvironment.
Theoreticalstudiesindicatethreemainwaysthatinformationsharingcouldbetterofff i n a n c i a l system.Firstly,i n f o r m a t i o n s h a r i n g r e d u c e s moralh a z a r d a n d e n c o u r a g e b o r r o w e r s torepayandpayintime.Becauselaterepaymentsanddefaultersare c o n s i d e r e d u n a c c e p t a b l e , b o r r o w e r s d e c i d e tor e p a y t o a v o i d anyp u n i s h m e n t s u c h a s c ap t u r ed inblacklist oranydoubtfullist,whichc o u l d reducefuturee xternal financing (Kl ein , 1 9 9 2 ; V e r c a m m e n , 1 9 9 5 ; P a d i l l a & P a g a n o ,
2 0 0 0 ) Ina d d i t i o n , i n f o r m a t i o n sharingkeepsfirms’activitiestransparent.Ifthey wanttopayoff,theyhavetoworkharda n d payattentiontothebusiness,fromwhichmoralha zardreduces(Padilla&Pagano,1 9 9 7 ) S e c o n d l y , a d v e r s e s e l e c t i o n i s p r e v e n t e d a s b a n k n o w h a v e morea n d a c c u r a t e i n f o r m a t i o n aboutcustomertomakearigh tdecision(PaganoandJappelli,1993).Thirdly,w i t h i n f o r m a t i o n s h a r i n g , f i r m s c a n n o t b e o v e r - b o r r o w i n g a s l e n d e r s c o u l d a c c e s s i n d e b t e d n e s s o f t h e i r c u s t o m e r fro ma l l l e n d e r s i n t h e m a r k e t ( B e n n a r d o e t a l , 2 0 1 5 ) S o m e moree v i d e n c e s s t a t e t h a t i n f o r m a t i o n s h a r i n g c o u l d r e d u c e c r e d i t r i s k
(JappelliandPagano,2002),defaultrates(Powelletal.2004;Houstonetal.,2010)andals olikelihoodoffinancialcrisis(Houstonetal.,2010;Büyükkarabacak&Valev,2012).
Bankpenetrationi nthispaper r e f e r s tophysicaloutreach bybanksa n d len dinginstitutions.Inaneasymeasurement,itisthenumberofbranchesofbanksandlendingin stitutionsa v a i l a b l e ina t e r r i t o r y H a v i n g moreb r a n c h e s d o e s n o t n e c e s s a r i l y m e a n h i g h e r markets h a r e s f o r a b a n k o r a f i n a n c i a l i n s t i t u t i o n b u t a h i g h e r l e v e l o f s e r v i c e availability.C u s t o m e r s o f t h e b a n k c o u l d u s e f i n a n c i a l s e r v i c e a t a l a r g e r numbero f p l a c e s , whichcreatesbettercustomerserviceforloanprovidersan dgreaterconveniencei n operationforcustomers.Furthermore,highlevelofbankp enetrationspeciallyencouragesmicrofinancetogrow.Banknowhasmorebusiness,moreo pportunitytoearnm o n ey andfinancialsystemisbetteroff.
InformationsharingandBankpenetration role totaxevasion
Many enterprises engage in tax evasion or deny their legal corporate tax duties, as categorized by Becket et al (2014) into two main groups The first group, operating underdeveloped institutions, gains minimal benefits from formalization and often chooses to hide their output This approach not only alleviates their tax burden but also subjects them to a non-supportive business environment and potential government penalties The second group opts for formalization but manipulates their financial statements to reduce tax obligations, making them harder to detect due to the inaccuracies in their financial records Ultimately, both groups face illegal activities, trading potential punishments and low credibility for the avoidance of additional tax burdens Theoretical and empirical evidence has been provided to assess the impact of information sharing and bank penetration on corporate tax evasion levels.
First,bybasingonfinancialconstraint,AllinghamandSandmo(1972)suggestedt h a t a r a t i o n a l i n d i v i d u a l d e c i d e s t o payo r n o t t o payt a x d u e t o t h e i r c a l c u l a t i o n o f max i mi zin g h i s o r herutility.It meanst h a t taxpayerc o m p l e t e s r e q u i r e d t a x d u t i e s b e c a u s e oftheirbalance betweenthe riskofbeing punished orgetting financial finesand
(2000)laterclarifiedthehighermotivationsoffirmst o h i d e t h e i r i n c o m e i n u n d e r d e v e l o p e d m a r k e t - s u p p o r t i n s t i t u t i o n b e c a u s e theyca n n o t makegooduseofbeingformal.Straub(2 005)andBecketal.
(2007)suggestedt h a t b e t t e r a c c e s s t o formalc r e d i t s e r v i c e s h e l p t o i n c r e a s e formalo p e r a t i n g f i r m s ’ b en e fi t s Moreover,informationsharingispointedou ttolowertransactioncostsa n d i m p r o v e c r e d i t e f f i c i e n c y bye n h a n c i n g c r e d i t a v a i l a b i l i t y ( B r o w n e t a l , 2 0 0 9 ) a n d r e d u c i n g bankcorruptioninle nding(Barthetal.,2009).Theseevidencesboostbenefitso fformalfirms,thus,lowermotiva tionstoevadetaxoftheinformalgroup.
Improving information sharing and bank penetration can significantly reduce hidden revenues from tax evasion, which often leads to uncertainty in financial reports This uncertainty increases the costs for banks as they must double-check to mitigate potential risks, and these additional costs are typically passed on to borrowers through higher interest rates and stricter loan terms (Graham et al., 2008) In financial systems with robust information sharing and high bank penetration, firms that misreport their revenues face greater obstacles in obtaining loans Formal banks and other financial intermediaries favor well-functioning firms due to lower risks associated with reduced information asymmetry, making them less likely to allocate resources to firms with misreported revenues Consequently, the opportunity costs of tax evasion are higher in countries with enhanced information sharing and strong bank penetration (Beck et al., 2014).
Besides,thereareoffseteffects.Taxevadedfirmsdonotlisthiddenresourcesast h e i r as se t s H o w e v e r , a s firmsn e e d c o l l a t e r a l w h e n b o r r o w i n g , firmse n g a g i n g i n t a x e v a s i o n havelessopportunitytohavecollateralfortheirloans.Thus,stricterloante rmsandhigherinterestscouldbeincludedincasebanksaccepttogiveloans.Incountriesthata r e inh ighlevelofinformationsharingandbankpenetrationcontext,theimportanceofc o l l a t e r
21 a l islowaslendersnowcanmonitorborrowersthankstolessinformationasymmet ry (Beck etal.,2011).Firmsmaybenefitwhileless collateralisrequiredinaloan.Again,taxe vasionworsensfirms’opportunitiesinthesecountries.
Previousempiricalstudiesalsoemphasizetheroleoffirmsizeandlocationtotaxev asi onproblem.Beck etal.(2005)foundthatsmallfirms aremoresensitive tofinancials e c t o r d e p t h t h a n l a r g e r o n e s T h e s a m e p a t t e r n h a p p e n s t o f i r m s i n smallc i t i e s a n d t o w n s , theytendtorespond athigherlevelthanthosein centercities.Moreover,Houstonetal.
(2000)pointedoutthataccesstoformalfinancebenefitthegroupofsmallfirmsasw e l l asfirm sthatdependonexternalfinanceandhavehighgrowthopportunitiesmorethanlarger firms.Theauthors thensuggestthatinformationsharingand bank penetrationmayhavedifferentimpactsondifferentgroupsoffirmsize,locationandthats mallerasw e l l a s e x t e r n a l f i n a n c e d e p e n d e n t a n d p o t e n t i a l h i g h g r o w t h fi rmsr e a c t s t r o n g e r t o c h a n g e s ofthetwointermediaryfinancialfactorsthantheiroppositegr oups.
Methodology
Newtaxevasionindex
Taxe v a s i o n decisiond e p e n d s o n e x p e r i e n c e s o f firm’sm a n a g e r s aboutm ac r o e c o n o m i c , microeconomic,andfirm’characteristicsvariables.Thesa mestatusoftwo countriesdoesnotrequiresimilartaxevasionratio,aswellastwosimil arfirmsdon otneedthesametaxevasionstatus.Firms’managersowntheirdecisiononwhichl evelo f t a x compliancet h a t firmsw o u l d f o l l o w H e n c e , a l l v a r i a b l e s mustb e r e p r e s e n t e d throughexperiencesofmanagerstohavebestestimationresults.
TheWorldBankEnterprisesSurvey fitsrequirementsofvariablesbecauseoftwof o l l o w i n g reasons.First,thesurveyisdesig nedtointerviewface-to- facewithmanagerso f thecompany,especiallymanagingdirectors.Alternativescouldbeth eheadofhumanr e s o u r c e s a n d a c c o u n t a n t s ; b o t h o f w h i c h a r e d i r e c t l y o r i n d i r e c t l y r e l a t e d t o d e c i s i o n makingoffirms’directorabouttaxandothermajorprobl emsinbusiness.Second,thec h o s e n q u e s t i o n i s d e t e r m i n e d b a s e d on4 l e v e l s s c a l e : ( i ) N o O b s t a c l e ; ( i i ) a M i n o r Obstacle;
(iii)aMajorObstacle;and(iv)aVerysevereObstacle 6I t ’ s thenexpectedtoc a p t u r e exp eriencesoffirms’headsaboutproblemsinmanagingprocessandtoforecasttaxevasiontren d.
Basedonthedatabase,tax andsocialsecurity couldbe represented byass essmentoftaxrates(Questionj30a).Thefeelingabouttaxratesingeneralshow swhetherafirmisreallytobalancebetweencostandbenefit ofpayingt a x I ftaxistoohighwhenbusinessenvironmentisunderdeveloped,taxev asionwouldh appen.
6 Whiledealingwiththedataset,weremovedanswerswhich areoutofthisscale,includingD o n ’ t knowand
Amongr e g u l a t i o n s , g e t t i n g b u s i n e s s l i c e n s e s a n d permits(Question j30c)i s alwaysthebeginningofanyfirmsandifobstacleoccurshere,firms’ma nagerw o u l d tendtohidetheirincomeratherthandoitpublicandpaytaxes.Itisthench osenasaproxyforfirmstoassessregulation.
Electricityisonemaintypeofpublicsectorservices,especiallyindeveloping c o u n t r i e s whenthegovernmentstakecontrolofelectricityp r o d u c t i o n anddi stribution.E l e c t r i c i t y a l s o playsa h u g e r o l e t o b u s i n e s s e s o f firmst h r o u g h o perat io ns o f m a c h i n e s a n d f a c t o r i e s Meetingo b s t a c l e i n u s i n g e l e c t r i c i t y reducesaremarkable amount offirms’ benefitand turnstheir tendencytowardst a x evasion.Thenweselectobstacleinelectricity(Questionc3
Whenmentioningqualityofinstitutions,weusepoliticalinstabilityasam e a s u r e m e n t (Questionj30e).Highinstabilitylevelcreatesriskanduncertaintyi n busin essenvironmentandreducesgovernment’sabilitytocontroltheeconomy Firmswouldbemorelikelytohidetheirprofitthen.
Final,obstacleincorruption (Questionj30f)isusedtoestimate tax compliance.A highcorruptioncountryisthesigntoindicatebadeconomicgoverna nceandc r e at e opportunityforfirmstoevadetax.Voetal.
(2015)usingASEANdatafou nd thepositiveimpactsofcorruptiononshadow economy.Theyalsofoundo u t g r e a t e r l e v e l thatc o r r u p t i o n i m p a c t s s h a d o w e c o n o m y th an s h a d o w e co n o my influencescorruptionstatus.
ThenewTEIisthenconstructedbycalculatingequallyweightedaverageoffivei ndicatorswhichrepresentf o r t h e a b o v e f i v e mains o u r c e s o f influence.I t s h o u l d b e w e i g h t e d inaparticularcountrytogiveabettermeaning.However,duetotimeconstrain t,onlytheequallyweightedaverageisconsideredinthisstudy.
Conceptualframework
Tax and social security contribution burdens
Firm size Quality of institutions
GDP per capital Firm age Manager s experience level sectorservices,
(iv)Qualityofinstitutionsand(v)taxcompliance.Eachofthesefactorsi s equallyweightedint hefinalindex.DetaileddefinitionsandcalculationsarereferredtoS e c t i o n 3.3.1ofthisstudy.T hen,theinfluenceofinformationsharingandbankp e n e t r a t i o n totaxevasionareinv estigatedbyregressions,withsub- factorsoffirmsizean dlocation.Controlvariablesareincludedineveryregression.
Financialdevelopmentsversustaxevasion
(2014)whichrepresentsf i n a n c i a l developmentfactorsasdescriptivevariablesfortaxeva sion,togetherwithotherc o n t r o l variablesatfirmandcountrylevel.
(1)whereTijkpresentsfortaxevasionratioasdefinedofcountryi,firmjandindustryk;Fi ist h e v e c t o r o f f i n a n c i a l s e c t o r i n d i c a t o r s , i n c l u d i n g i n f o r m a t i o n s h a r i n g a n d b r a n c h penetrationvariables;C iand B jare groupsofcontrolvariablesatcountryandfirmlevel,respecti vely;θ ka r e groupof15industrydummiesandεijkr e p r e s e n t serrorterms.
Theinclusionofindustrydummiesisreasonableandnecessary.Becauseofd i f f e r e n t businessenvironmentandlaw,differentindustriesareexpectedtohavedifferenttaxevasionpatterns. Then,thedummiesallowseparatedanalysisbetweenindustries.Listo f i nd ust ri es is availabl eatAppendix B.Wea lso include yeardummies tocontrolthe wit hin- count ry differencescausedbyglobaltrend.
AsTEIisaratio,whichisgreaterthan0 butlessthan1,thetobitregressionapproachwithlowerli mitof0andupperlimitof1i s goingtobeapplied Webasedmoreonmarginaleffecttha noncoefficienttoassess economici n f l u e n c e s R o b u s t s t a n d a r d e r r o r s a r e r e p o r t e d toa v o i d p o t e n t i a l h e t e r o s c e d a s t i c i t y
(3)where:Size j isthe vectorof firmj’s size,includingsmallfirmandlarge firmdummies,ascomparedtomid-sizefirms;Location ji s thevectoroffirmj’s location,includingcapital cityandsmallcitydummies,ascomparedtomid-sizedcities.
We propose that a negative coefficient of α in all regressions indicates that a higher level of financial development leads to a reduction in tax evasion The theory anticipates negative coefficients for interactive terms between financial development and small firms or small cities, while positive coefficients are expected for interactive terms relating to large firms and capital cities (Beck et al., 2014).
Data
2 0 1 4 i s adopted.DevelopingcountriesarethenselectedbasedonthedefinitionofWorld Bank 7t o h a v e a d a t a s e t c o n s i s t i n g o f 1 1 2 d e v e l o p i n g c o u n t r i e s w i t h m o r e t h a n 2 9 t h o u s a n d o b s e r v a t i o n s aroundtheworld Informationsharingvariable sareretrievedfrom WorldB a n k DoingBusinessdatabase,whilebankpenetrationvariable s takenfromWorldBankD e v e l o p m e n t I n d i c a t o r s d a t a b a s e Dataf o r o t h e r v a r i a b l e s isi n t u r n s c o l l e c t e d a n d summarizedfromthreementionedsources.
The authors utilize two measurement methods for information sharing variables, sourced from the World Bank's Doing Business database and panel data The first variable, coded as "info sharing data table" and regression results, determines the presence of an information sharing agency, such as a public credit registry or private credit bureau, within a country The existence of such an agency indicates a higher level of information sharing, as it can collect and disseminate information to banks and financial institutions This variable is binary, with values of 1 for 'yes' and 0 for 'no.' The second variable, "depth of information sharing," serves as a more detailed indicator, ranging from zero to six based on the number of characteristics present in a country's financial system, evaluated against a set of six specific features.
(3)datafromretailers,tradecreditors, orutilities,asw e l l asfromfinancialinstitutions,aredistributed;
(5)dataarecollectedonallloansofvalueabove1%ofincomepercapit a; and(6)lawspr ovideforborrowers’righttoinspecttheirowndata.The higher
The World Bank classifies countries into developing categories based on their income levels Low-income countries are defined as those with a per capita income of $1,045 or less Middle-income countries are further divided into two subgroups: lower-middle-income countries, which have a per capita income ranging from $1,046 to $4,125, and upper-middle-income countries, with incomes between $4,126 and $12,735.
Businessdatabasechangesthemethodandadd2morefeatures,makingdepthofinformationsharingindexrangingfrom0to 8(seetheDoingBusinesswebsite:http:// www.doingbusiness.org/).However,toa l l o w comparisonovertime,inthispaper,weusetheformerindexrangingfr om0to6. valueofthesecondmeasurementshowsadeeperinformationsharingstatusandalsoa moretransparentcreditenvironment.
Forb a n k p e n e t r a t i o n v a r i a b l e s , t h e p a p e r u s e s t w o r e p r e s e n t a t i v e s :g e o g r a p h i c bankp e n e t r a t i o n a n d d e m o g r a p h i c b a n k p e n e t r a t i o n,b o t h o f w h i c h o r i g i n a t e s fromWorldBankWorldDevelopmentIndicatorsd atabaseandhavepaneldata.Whiled e m o g r a p h i c bankpenetration,whichdescribesnumb erofcommercialbankbranchesper
100.000adults,istakendirectlyfromthedatabase,thegeographiconeiscalculatedb yt h e formula:
Byt h i s c a l c u l a t i o n , t h e a u t h o r s i n d i c a t e t h e meaningo f n u m b e r o f c o m m e r c i a l bankbranchesper10,000squarekilometersforgeographicbankpenetration.IntheRHS,thefirstfr actionillustratesthetotalnumberofcommercialbankbranchesinacountry.T h e n t he sec on df ra ct io n modifiest h e res ul t t o ha ve a “p er 10, 00 0 s q u a re k il om ete rs” indi cator.
F i r m s i z e d i s t i n g u i s h e s t w o c a t e g o r i e s s m a l l a n d l a r g e f i r m s i z e w i t h t w o d i f f e r e n t d u m m y variables.Whilesmall- sizedfirmvariableequal1ifanenterprisehasfrom5to1 9 e m p l o y e e s , l a r g e s i z e d f i r m v a r i a b l e t a k e s i n t o a c c o u n t e n t e r p r i s e s w i t h o v e r 1 0 0 employees.F i r m ’ s l o c a t i o n i n d i c a t o r sa l s o i n c l u d e c a p i t a l , w h i c h r e f e r s t o e n t e r p r i s e s locat edincapitalcity,andsmallcity,w h i c h consistsoffirmsinc i t y withlesst h a n 2 5 0 , 0 0 0 inpo pulation.Themiddle-sizedfirmsandcitiesaretheomittedcategories.
Inaddition,weaddfirmage,bywhichwetakenaturallogarithmoftotaloperatingyearsofafi rmuntil2016,naturallogarithmofGDPpercapitalandcovertheexperiencel e v e l oftopmanage rs.Tocontroleconomictrendthroughtime,weaddedyeardummies correspondentt o timeo f entry.A p p e n d i x A s u m m a r y allv a r i a b l e s t o g e t h e r w i t h t h e i r d ef in ition anddatasource.
The Tax Evasion Index (TEI) varies significantly among countries, with Brazil having the highest TEI at 0.7539 and Eritrea the lowest at 0.25, while the average TEI across the 112 countries studied is approximately 0.62 The variation in TEI between countries is about 0.17, primarily influenced by public sector service issues, particularly electricity problems, which show a substantial standard variance of nearly 1.11 Corruption is a major contributor to the TEI, with an average score of approximately 2.76 The average TEI for each country during the research period is detailed in Table 1.
St.Lucia St.Vincentand Grenadines
The new Tax Evasion Index (TEI) offers three significant advantages over current measurement methods Firstly, it utilizes a model-based approach, which is recognized as the most advanced methodology in the literature, enabling researchers to consider multiple aspects of tax evasion without relying on the quality of a single survey Secondly, the TEI encompasses five key dimensions of tax evasion, integrating them into a comprehensive index that enhances measurement accuracy and reflects the economic significance of the data Lastly, the TEI's structure allows for the creation of tailored scenarios for various regions, countries, or industries by assigning different weights to each factor, acknowledging that these factors may impact tax evasion differently across contexts However, due to study constraints, the authors could not assign equal contributions to the factors or define specific scenarios for each country, highlighting the need for future research to further explore this area.
FindingacomparableindexforthenewTEImeetsdifficultiesintimerangeandsamples i z e Witha n a m o u n t o f 1 1 2 d e v e l o p i n g c o u n t r i e s , t h i s i n d e x c o v e r s mosto f d e v e l o p i n g countrieslistedbyWorldBankandcoversalsothetimerangeof9yearsfrom2006to201 4providedbythestandardizeddataset.Manyempiricalstudiesfocusonotherg ro u p o f c o u n t r i e s w h i c h i s E U ( i n c l u d i n g
A d a i r , 2 0 1 2 ; S c h n e i d e r e t a l , 2 0 1 5 ) o r differenttimeperiods(includingSc hneider&Ernste, 2000; Schneider, 2004;Beck etal.,2 0 1 4 ) Forpossibilities ofcomparingthisindextoothers,relevantindexcouldbeexertedo rTEItoberecalculatestohaveco mparableresultswithothers.
Amongf i n a n c i a l d e v e l o p m e n t v a r i a b l e s , b a n k p e n e t r a t i o n r e p r e s e n t a t i v e s h a v e r e l a t i v e highs t a n d a r d deviations.I t p o i n t s o u t the d i f f e r e n c e i nb a n k pen et ra ti on l e v e l w i t h i n developinggroups.Bothdemographicandgeographic bankpenetrationsharedthesameissue.Thismayaresultofdifferentdevelopmentlevelofcountrie sordifferencesinr e l a t e d socialtermsintheirdefinitionlikepopulation,totalarea.
Smallsizedcompanieshavehighestquantityinoursample.Thelargerthec o m p a n y is,thelessinquantityitexistsinthedatabase.Smallsizedcompanyincluded firmswithlessthan20employees,itaccounts for44.75%inour29557entries.Large firmsoflargerthan100employeesonlytake17.87%.
Numberoffirmsincapitalcityinoursamplenearlymatcheswiththequantityoffirmsl ocatedinsmallcities.Thepercentageoffirmsincapitalcitiesis16.65%whilethatnumberfromsmal lcitiesis18.35%.Aswecouldseethatonecountryhasjustonecapitalc i t y butalotofsmallcities.T hisresultsshowthatthesurveyputsitsconcentrationaloti ncapitalcitywithagreatnumberofpa rticipants,orexpressthetrendofconvergenceofb u si n es s incapitalcities.
Thefirsthypothesis:Informationsharing,bankpenetrationandtaxevasion
As e t o f 0 5 r e g r e s s i o n s i s c o n d u c t e d toe x p l o r e t h e f i r s t r e s e a r c h q u e s t i o n : D o h i g h e r informationsharinglevelandwiderbankpenetrationhelptoreducetaxevasioni nd ev el op in g c o u n t r i e s ?
T h e a u t h o r s s e q u e n t i a l l y p u t r e p r e s e n t a t i v e v a r i a b l e s intor e g r e s s i o n s tosee separatedinfluence, andcombine2factors:information sharing andb a n k penetrationi nt o a n o t h e r regressionto sho w concurrentef fec ts Webase mor e on marginaleffectstodescriberelationshipsbetweenvariables.
34 evasionstatusoffirmsinthedevelopingcountriesatsignificantlevelof1percent.Basedo n theirmar ginaleffects,anexistenceofpublicorprivatecreditbureauaswellasadeeplevelofinformatio nsharingwouldreducetaxevasionprobabilityoffirmsregardlessoff i r m s i z e a n d l o c a t i o n ,c e t e r i s p a r i b u s.I t i s r e a s o n a b l e a s h i g h e r l e v e l o f i n f o r m a t i o n sharin gp r o p o s e s a moret r a n s p a r e n t f i n a n c i a l e n v i r o n m e n t B u s i n e s s o w n e r s a r e mo reincentives aseverymistaketheymake in taxevasion could lead tobadcredit positioning,w h i c h negativelyandseverelyaffectstheabilityofgettingcreditoftheenterprise.T h e s e r e s u l t s a r e c o n s i s t e n t w i t h literatureexpectationaswellasempiricalstudiesi n c l u d i n g B r o w n etal.(2009)andBecketal.(2014).
Effectofbankpenetrationthroughdemographicbankpenetrationandgeographicban kpe ne tra ti on t ot a x evas io n s t a t u s isa l s o statisticallysignificanta t 1 pe r c e n t a n d n e g a t i v e Then,holdingothervariablesunchanged,wefoundthatahigherlevelof bankp e n etr ati on wouldlowertaxevasionlevelbyfirms.Theimpactisalsoconsistentwhenb ank penetrationandinformationsharingrepresentativesareincludedinregression(5).
Ourcontrolvariablesalsomatterthroughfiveregressions.Firmsinsmallcityarel es s likelytocheatintaxwhilefirmsincapitalcityevadetaxmoreoftenthanmediums i z e citie s.Thisresultisinconsistentwithpreviousempiricalresults.Thereasonforthism a y comef romadministrationmanagementsystemincities.Withanequivalentlevelofm a n a g e m e n t , t a x o f f i c e r w o u l d b e m o r e l i k e l y t o c o v e r t h e p o s s i b i l i t y o f c h e a t i n g i n s mall citiesthanincapitalcitiesduetosmallernumberofcasestobemanaged.Anotherr e a s o n is t h a t t h e l i f e styleo f p e o p l e insm a l l c i t i es int h e d e ve l o p i n g c o u n t r i e s ke e p s t h em updatedaboutsurroundingenvironment Theyknoweachotherverywell,wh ichincreasesthefearofbeingcaughtcheatingandashamedwithneighbors.
Largereconomiesandolderfirmsarefoundtoassociatewithlowerlevelofta xev asio n a s c o e f f i c i e n t o f G D P p e r c a p i t a a n d f i r m a g e isn e g a t i v e L a r g e economyexpressesagoodoverallenvironmentforenterprisestooperate,afairan dtightenoughr e g u l a t i o n tobalancetheeconomiesandaremarkablelevelofcompeten
35 ceinthemarketwheremanycompaniesdobusinesstogether.Beinginalargeeconomyrequire sfirmsto complywiththeregulationswhilemaintainagoodbusiness,orsoonberemovedfrom t h e market.T h i s c r e a t e s a h i g h e r t a x c o m p l i a n c e e c o n o m i c society,f r o m w h i c h t a x e v a s i o n isrelieved.Ontheotherhand,olderfirmshavecertainreputationw hichpowersuptheirbrandvalue.Iftheydecidenottocomplywithtax,incaseofbeingcaught, theywilllosenotonlythevalueoftaxandfines,butalsothedropintheirbrandvaluewhichse verelyi m p a c t t h e i r normalo p e r a t i o n Ing e n e r a l , t h e c o s t o f t a x n o n - c o m p l i a n c e i s h i g h e r foroldfirmthantheothers.
Finally,higherleveloftopmanager’sexperiencewouldsuggestastrongert e n d e n c y o f firmst o w a r d s t a x e v a s i o n T h i s e f f e c t i s p o s i t i v e a n d c o n s i s t e n t a c r o s s 5 r eg r e s si o n s Becauseexperiencedmanagersarebelievedtospecializeinbusine ss,u n d e r s t an d law,theymayknowhowtodealwiththetax.Inmanycases,corruptionusingrela tionshipw i t h t a x authoritiesbyt o p m a n a g e r s , e s p e c i a l l y e x p e r i e n c e d o n e s , a l s o c r e a t e s t a x e v a s i o n I n c o n c l u s i o n , h i g h e r i n f o r m a t i o n s h a r i n g l e v e l a n d w i d e r b a n k p en e t r at i o n arefoundtoreducetaxevasioninthedevel opingcountries.
Thesecond hypothesis:Firmsizeandlocation influences
Weexpectadifferentialrelationshipof thefinancialdevelopment va ri ab l es andtax e v a s i o n a c r o s s firmswithdifferents i z e s Wedot h r e e r e g r e s s i o n s a n d a d d s i x interactivetermsbetweenfirmsizeandfinancialdevelopmentvariablest oresearchthee f f e c t o f f i r m s i z e o n t h e o r i g i n a l r e l a t i o n s h i p Wea l s o k e e p o t h e r c o n t r o l v a r i a b l e s , i n d u s t r y dummiesandyeardummiestopreventunexpectedbias ness.
ThecoefficientsinTable3showaconsistent patternof threecolumns.Ingeneral,in fo rmat io n sharingandbankpenetrationwouldhavehighereff ectsonlargerfirmsthanm e d i u m sizedfirmsatsignificantlevelof1percent;whilesmallfi rmsarenotfoundasa n i n f l u e n t i a l f a c t o r T h i s i s r e a s o n a b l e a s l a r g e fir msh a v e c e r t a i n r e s p e c t t o w a r d s r e g u l a t i o n s top r o t e c t t h e i r o p e r a t i o n , e s p e c i a l l y i n t r a n s p a r e n t b u s i n e s s e n v i r o n m e n t
Similarly,we also expecta d i f f e r e n t i a l r e l a t i o n s h i p o f f i n a n c i a l d e v e l o p m e n t v a r i a b l e s andtaxevasion acrossfirmswithd if fe r en t location E f f e c t oflo cat io n totaxev asio n andfinancialdevelopmentrelationshipar eshowninTable4.Weapplythesame methodofaddinginteractivetermsbetweenvariablesanddoregressiontoinvestigatethee f f e c t
Locatingincapitalcityseemsnotto impact theconnectionwhilelocatinginsmallc i t i e s and townsweakenstherelationshipas coefficientsofinteractivetermsare oppositeto financialdevelopment’scoefficient Insmallcity,thereislimitedeffec toffinanciald e v e l o p m e n t o n f i r m s ’ taxd e c i s i o n T h e d i s t a n c e t o e c o n o m i c c e n t e r m a y r e d u c e t h e strengthofregulationsasit’shardfortaxofficertooftenvisitfirmsan dcheckfinancialstatus.However,thiseffectispositiveandinsignificantwhenwetakedemograp hicbankp e n et r a t i o n asacriterion.Theresultsarenotsoconsistentacrossthreeregr essions,butcouldbedescribedasatrendasabove.
OthercontrolvariablesinTable3andTable4sharethesameresultsandsimilartoTa ble2.Smallc i t y l o c a t e d , o l d e r f i r m s a n d h i g h e r G D P p e r c a p i t a c o u n t r i e s a r e a s s o c i a t e d withlower levelof taxevasion; whilecapitalcitylocatedfirmsandfirmswithh ig herexperienceoftopmanagerarelesslikelyt oevadetax.Thiswouldagainconfirmo u r results andmakeeconomicmeaningsstronger.Insummary,information sharing andb a n k penetrationarefoundtohavehighereffectsonlargefirms,lowereffectsonfir mslocatinginsmallcitiesandtownswhilethatkindofrelationshipsareinsignificantwith s m a l l firmsaswellasfirmsatcapitalcity.
Conclusions
Shadoweconomyreferstotaxablebusiness activitiesbut failedtobereporte dbyf inan ci al/ t a x a u t h o r i t y A s a r e s u l t o f s h a d o w e c o n o m y , t a x e v a s i o n d e f i n e s i l l e g a l activitieswhichaimtoconcealtaxableincomefromtaxauthoritiesor includ eexpensew h i c h arenotallowedtoreducetaxliability.Byreportasmallerincome,orine xtremec a s e , noincome,enterprisescouldevadetaxandsavethemoney.Enterpriseswhichhave e v a d e d taxfacepotentialsofbeingcaughtcheatingandnotonlytheamountofevade dtaxbutalsoafineisapplied.
Taxe v a s i o n a n d s h a d o w e c o n o m y a r e c r i t i c a l problemsa n d b a r r i e r s t o g r o w t h , r e g a r d l e s s ofalevelofeconomicdevelopment.However,theissueismor eseriousandd i f f i c u l t t o t a c k l e i n de v e l o p i n g c o u n t r i e s thani n thed e v e l o p e d n a t i o n s A n e x t e ns i v e literaturereviewpresentsthatthefollowingfactorshavegenerall yplayedanimportantr o l e i n t h e d e c i s i o n ofw h e t h e r o r n o t f i r m s w o u l d e v a d e t a x t h a t : ( i ) t a x a n d s o c i a l securi ty contributionburdens;(ii)regulations; (iii)publicsectorservices;(iv)qualityofinstitutions;and(v)taxcompliance.
Thisstudyisconductedtoprovideacloserlooktotaxevasioninthedevelopingco u n tr i es by(i)developinganewTEIusingdatafromstandardizedWorldBankE n t e rp r i s e s survey2006–2014;(ii) exploringtheimportanceofinformation sharing andbank penetrationtotaxevasion;and(iii)investigatingtheroleoffirmsize,locationtotheinfor mations h a r i n g , b a n k p e n e t r a t i o n a n d t a x e v a s i o n r e l a t i o n s h i p Keyfindings f r o m t h i s empiricalstudycanbesummarizedbelow.
First,o ntheground oft h e literaturereview,taxevasioninm a n y aspects,froma p p r o a c h toframeworkanddeterminants,isanalyzed.Amodelapproachfortaxevasionisa d o p t e d t o combinemultii n d i c a t o r s a n d multic a u s e s i n a n e w l y de ve lo ped u n i q u e index.
T h e n , t h e i n f l u e n t i a l f a c t o r s i n c l u d i n g :( i ) t a x a n d s o c i a l s e c u r i t y c o n t r i b u t i o n burdens;(ii)regulations;(iii)publicsectorservices;
(iv)qualityofinstitutions;and(v)t a x c o m p l i a n c e u s i n g t h e e q u a l w e i g h t a r e a p p l i e d tod e v e l o p t h e s o - c a l l e d n e w t a x e v a s i o n index(TEI).Thisnewindexvarieswithintherangeof0.25to1a ndthereisnozero- valueincludedwithintherange.Intheresearchsample,BrazilhashighestTEIof0 7
5 3 9 whereasEritreahasthelowestTEIof0.25.ThevariationofTEIacrosscountriesisappro ximately0.17,mostlycausedbydifferenceinpublicsectorservices.Corruptioncontribut est h e m o s t p a r t t o t h e i n d e x w i t h i t s meano f a p p r o x i m a t e l y 2 7 6 w i t h i n t h e r a n g e of0and4.
(2014)wasusedtodeveloptheresearchmethodology andtotesttheresearchhypotheses.Aseriesoftobitregressionsisa d o p t e d to i n v es t i g a t e t h e informations h a r i n g, b a n k p e ne t r a t i o n and t a xe v as i o n r e l a t i o n s h i p , usingtheT EIasaproxyfortaxevasion.Theempiricalresultspresentthath i g h e r l e v e l o f i n f o r m a t i o n s h a r i n g a n d bankp e n e t r a t i o n mightl o w e r t a x e v a s i o n f o r countriesinth eresearchsample.Thisisconsistentwithfindingsfrompreviouslye m p i r i c a l studiesinc ludingBrownetal.(2009)andBecketal.(2014).
The interactive terms of financial developments, firm size, and location were incorporated into the regression equation to investigate their influence on the relationship between information sharing, bank penetration, and tax evasion Our findings reveal that larger firms are less likely to evade taxes in environments with advanced financial developments Additionally, firms situated in smaller regions tend to evade taxes more frequently than those in medium-sized cities, particularly when there is a high level of information sharing or bank penetration However, the characteristics of being located in capital cities or smaller regions do not significantly affect the relationship between information sharing, bank penetration, and tax evasion These empirical results contribute valuable insights to the literature on the effects of firm size and location on the link between tax evasion and financial development.
Policyimplications
On the ground ofthe aboveempirical findings, policyimplications arethen drawnf o r thedevelopinggovernmentsingeneralincludingtheGovernmentofVietna m.Eacho f thesepolicyimplicationsisdiscussedinturnbelow.
First,t h e d e v e l o p m e n t o f t h e n e w t a x e v a s i o n i n d e x ( T E I ) i s u r g e n t l y n e e d e d w h i c h c a n p r o v i d e t h e g o v e r n m e n t s w i t h t h e e v i d e n c e t o i m p l e m e n t p o l i c i e s w h i c h includet h e be s t p os s i b l e approach methodtoreduc e ta xe v as i o n inacountry T h e s e t includingfivefundamentalfactors,whichisadoptedint hisstudy,isnotonlyusedintheT EI c a l c u l a t i o n b u t a l s o p r o v i d e s ani n s i g h t f o r t a x a u t h o r i t i e s t o c o n s i d e r e a c h i s s u e includedwithinthegroupseparately:
( i v ) q u a l i t y o f i n s t i t u t i o n s ; a n d ( v ) t a x compliance.Policies addressingthe weaknessin theseareasmayprovide constrain totaxe v a s i o n occurring i n the ec on om y F o r ex a m p l e, f in di ng s fromthisstu dy i ndicatet h a t corruptionisthemostseriousissuefortaxevasionduetoitslargestcontrib utiontothen e w l y developedindex.Assuch,controllingcorruptionindevelopingcountriesinclud ingV i e t n a m canbeconsideredasaneffectiveapproachtolimittaxevasion.
Second,therelationshipbetweenfinancialdevelopmentssuchasinformationsharing,b ankpenetrationandtaxevasionsuggestanotherideafortaxgovernance.Thisrelation shipi s f o u n d n e g a t i v e a n d s i g n i f i c a n t , w h i c h meanst h a t h i g h e r i n f o r m a t i o n sha ringandbankpenetrationreducetaxevasion.Thisfindingsupportstheviewthata h i g h e r l e v e l o f financial developmentscould bef o c u s e d a s aneffectivemethodtoconstrain taxevasion.
Third,onthegroundoftheanalyses,itappearsthatevenifthereisahighlevelofinformat ionsharing andbankpenetrationin acountry,firmslocatinginsmallcityappeart o e v a d e t a x moreo f t e n b e c a u s e i s o l a t i o n c o u l d p r o v i d e m o r e o p p o r t u n i t i e s f o r t a x cheater.Assuch,governme ntsinthedeveloping countriesshouldenhance taxauthoritiesinquantityandqualityinsmallcitiessoasthesenewforcescanlimittaxevasionthrou ghr a n d o m taxinspection.Togetherwiththeenhancement,thegovernmentsmayalso have toc a r e a b o u t c o r r u p t i o n t o g u a r a n t e e f a i r n e s s anda c c u r a c y i n t h e p r o c e s s o f r e v e n u e collection.
Limitations
Thisstudyhassomel i m i t a t i o n s w h i c h c a n suggest f ur th er re sea rc hes First , t h e TEIshouldbeconstructedinaweightedmethodwithuniquecoefficientforeac harea, c o u n t r y a n d i n d u s t r y i n s t e a d o f e q u a l l y d i s t r i b u t e d S e c o n d , m o r e r o b u s t n e s s t e s t a n d i m p r o v e m e n t c o u l d b e madet o e n h a n c e r e g r e s s i o n r e s u l t s T h i r d , d a t a i s a v a i l a b l e f o r Vi e tn a m t o r u n s i m i l a r r e g r e s s i o n s ; t h i s c o u l d d e l i v e r muchmoremeaningfulpolicyimplicationforVietnamesegovernment.Final ly,findingandaddingmorecontrolv a r i a b l e s intotheregressionmodelcouldbetteroffthe results.
Inc o n c l u s i o n , d e s p i t e somel i m i t a t i o n s , t h i s s t u d y ise x p e c t e d t o c o n t r i b u t e t o e m p i r i c a l findingsaswellas growingliteratureoffinancialdevelopmentandtaxevasion.B a s e d o n t h e i d e a o f t h i s study, m a n y i n t e n s i v e r e s e a r c h e s c o u l d b e c o n d u c t e d i n t h e f u t u r e
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Variables Definition/Calculation Sources Level
Questionj 3 0 a : Assessmentoft a x r a t e s a s N o O b s t a c l e , a M i n o r Ob s t a c l e , a M aj o r Obstacle,ora VerySevereObstacle tothecurrent
Firm security operationsofthisestablishment. contribution burdens
Problemwith Questionj30c:AssessmentofbusinesslicensingandpermitsasNo WorldBankPrivate Firm regulations Obstacle,a M i n o r O b s t a c l e , a M a j o r O b s t a c l e , o r a VerySev ere
Questionc 3 0 a : Assessmento f e l e c t r i c i t y as N o O b s t a c l e , a M i n o r WorldBankPrivate Firm publicsector Obstacle, a MajorObstacle,ora VerySevereObstacle tothecurrent EnterpriseSurvey services operationsofthisestablishment.
QuestionJ30e:AssessmentofpoliticalinstabilityasNoObstacle,aM i n o r Obstacle,aMajorObstacle,oraVerySevereObstacletothe
WorldBankPrivate Firm taxcompliance Obstacle, a MajorObstacle,ora VerySevereObstacle tothecurrent operationsofthisestablishment.
Taxevasion Combiningfiveabovefactorsinanequallyaverage: sumanswersof Authors’contribution Firm ratio–firmlevel fivequestions/maximumpoints.
Information Thed u m m y v a r i a b l e equalsoneifani n f o r m a t i o n s h a r i n g a g e n c y WorldBank Country sharing (publiccreditregistryorprivatecreditbureau)operates inthecountry, zerootherwise.
Depthof “Depthofcreditinformationsharing”indicator,rangefrom0–6 WorldBank Country information “DoingBusiness” sharing database
Demographic Numbero f c o m m e r c i a l b a n k branchesp e r 1 0 0 0 0 0 adults( c o d e d WorldBankWorld Country bankpenetration FB.CBK.BRCH.P5inWDI) Development
Numberofcomme rcialbankbranche sper10.000squar ekm–calculatedby:
Basedonquestiona3:equal1ifacityislessthan250,000inp o p u l a t i o n (includingcategory4and5oftheanswer),otherwise0.
Basedonquestiona3:equal1ifacityisacapitalcity(includingc a t e g o r y 1oftheanswer),otherwise0.
Basedo n questiona 6 : S i z e , firmsa r e c a t e g o r i z e d b y number o f employees.Smallfirmshavefrom5to19employees.
Basedo n questiona 6 : S i z e , firmsa r e c a t e g o r i z e d b y number o f employees.Largefirmshaveover100employees.
LogoffirmageCalculatedbytakingcurrentyear(2016)lesstheanswerinquestionb 5 : I n whatyeard i d thisestablishmentb e g i n o p e r a t i o n s i n thiscountr y?
Variable Obs Mean Std.Dev Min Max
Ln(GDPpercapita) 29323 10.94837 2.227765 5.003872 17.11497 Ln(Firmage) 29553 3.065814 0.844493 0.693147 7.613325 Ln(Topmanager'sexperience) 29077 2.559333 0.771789 0 4.969813