Using Surveys for Measuring Tax Evasion Dynamics: Households and Firms

1. Using Surveys for Measuring Tax Evasion Dynamics:Households and Firms Jan Hanousek, CERGE-EI, Prague Filip Palda, ENAP, Montreal jan.hanousek@cerge-ei.cz, http://home.cerge-ei.cz/hanousek

2. Data -- Individuals • We used four representative retrospective surveys [non-panel] about 1,100 respondents in each wave (2000, 2002, 2004, 2006) • We asked respondents whether they evaded never, sometime, or frequently. Individuals classified as evaders or non-evaders. • We asked 2000 respondents this question for 1995, 1999, and 2000;2002 respondents for 1997, 2000, 2002; similarly five years back in 2004 and 2006.

3. Methodology -- Individuals • By asking the question for different years we were able to form an idea of how people drift between evading and not evading. (Markov chain transition probabilities) • Several tricks:  • Surveys called “Satisfaction with the services” • Several levels of tax evasion introduces • Run by an academic institution

4. Methodology - Retrospective questions • This is a key element, that allows to analyze non-panel data as a panel • We need to verify “consistency” of the surveys, i.e. that people remember! • Simply for non-panel data we need that answers to questions about past evasion in a survey taken in one year are statistically indistinguishable from answers to questions about contemporary evasion given in a survey a few years earlier

5. Example: Test of consistency of surveys

6. Individuals -- The extent of evasion, steps in survey • Soft measures “What percentage of others evade?” • Mild measures 1 “Do you buy undeclared goods/services never, sometimes, or frequently?” • Mild measures 2 “Do you evade never, sometimes, or frequently?” • Hard measures “How much of your income is undeclared?”

7. Estimating tax evasion dynamics

8. Data – Firm level evasion • Related to research on tax evasion and productive efficiency. • Key is to get the questionnaire filled by the firm owner, manager of a board member. • Best results from indirect questions, i.e. asking about others, horizontal & vertical

9. Example of our 2004/2006 surveys (retail & construction)

10. Joint distributions (Evasion & production) • Used how the firms sees the others in the segment (variation for partners, horizontal/vertical). • The answers of each firm were forced to sum to 100% by a Java algorithm. • Firms answered the question on the joint distribution of evasive and productive abilities by entering an internet site that forced their answers to sum to one by not allowing respondents to finish until their answers summed to one (hundred).

11. Dynamics -- Firms • Similar approach (Markov-type matrices) could be used even for the firms. We suggest though not to use question about their evasion but others. • It could be used, along with the tests and modified weighted values, w.r.t. sample weights (to achieve representative sample even for stratified sampling) • Obviously, there exists also a test of “consistency of surveys”, i.e. test that one would need if non-panel data will be used in panel-type setup.

12. Thank you! • Jan Hanousek, CERGE-EI • e-mail: jan.hanousek@cerge-ei.cz • tel: +420 224 005 119, web: www.cerge-ei.cz • Filip Palda, ENAP • e-mail: Filip.Palda@enap.ca

13. Appendix, some useful slides for Q&A

14. People do remember!!!

15. Short-run transition matrices

16. Short-run transition matrices (2)

17. Short overview of survey results • We used face-to-face interviews [conducted by Median], in 2000, 2002, 2004, and 2006 • Main features of tax evasion are: -- primarily a function of life-cycle (rising until late middle-age, then falling) -- primarily a male activity -- highly associated with part-time work and unemployment, related issues - misuse of social transfers and unemployment benefits, etc. not presented here

18. Trends in Mild measures

19. Trend in tax evasion in the Czech Republic

20. Policy/Research Issues in Tax Evasion • Estimates of the size (problems..) per se are not of broad interest [macro versus micro approach] More interesting/relevant issues are: • How tax evasion evolve? Will grow over the next x years? • What are margins of error of our estimates? • What are the factors determining tax evasion? • Possible remedies / policy recommendations

22. Flat tax 1994 2001 1995 1994 2004 2004 2005 2005 2003

23. 2000 survey: Years 1995, 1999, 2000

24. Why governmental services should matter? • People will free ride on government services if not forced to pay taxes. • Similar to voting paradox: If no one believes they can influence the outcome of an election, no one will vote. • The mystery of taxation is not why people evade taxes, but why they pay taxes. • We find strong evidence that indicates that citizens will avoid taxes if they do not believe they are getting quality government services for the taxes levied upon them.

25. Morality versus Instrumentality of Tax evasion • Some people will pay their taxes out of a sense of duty to the community. • Other tax payers will pay only if their feel that payment saves them from fines and imprisonment. • By recognizing both moral and instrumental reasons for the payment of taxes one can isolate the variables which will explain the decision to evade taxes.

26. Comparison: “Soft” measures of participation in tax evasion 2002 survey results 2000 survey results

27. Family reaction and morality of evasion

28. Overall assessment

29. Logit regression results for transition from never to a tax evasion stage

30. Logit regression results for transition from never to a tax evasion stage

31. Logit regression results for satisfaction with the government services

32. Conclusions & Policy recommendations • Tax evasion is linked with perceived probabilities of being caught and perceived penalties • People do not see the value they are getting for their taxes, link governmental services and tax evasion seen also in the other countries. • Simplified tax code (not necessary flat tax) would also lower latitude for shadow economy • There was the link (learning) from “passive” tax evasion to active participation in the underground econ. • Modern methods – credit cards significantly lower shadow economy (as registered transaction)