Tax Evasion in Czech and Slovak Republics: A tale of twins Jan Hanousek, CERGE-EI Filip Palda, ENAP

Main contributions First survey of tax evasion in Czech and Slovak Republics Separation of Czech and Slovak Republics a “natural experiment”

Method Tabular analysis of survey of 1062 Czechs and 524 Slovaks in year Demographics, attitudes to evasion, extent of evasion

The extent of evasion Soft measures “What percentage of others evades?” Table 1 Mild measures “Do you evade never, sometimes, or frequently?” Table 2 Hard measures “How much of your income is undeclared?” Table 3

Table 1. Soft" measures of participation in UE

Table 2: Engaged in the undeclared sector?

Table 3. Ranges of undeclared income

Comparison to stylized facts In demographic tendencies in conformity with past work (Tables 4A, 4B) –Men, especially married evade more –Evasion drops in retirement –No clear relation between evasion and education –Unemployed, self-employed evade more

Stylized facts (continue) Perceived audit and penalties –Contra to Scholz and Pinney (1993) who found little relation to beliefs and reality of audit probability we find those who evade often have the most precise estimates. –Elfers et al. (1987) find perceived penalty unrelated to frequency of evasion and no relation between severity of penalty and likelihood of apprehension. We find contrary result (Table 5).

Table 5: assessment of UE size

Stylized facts (continue) Morals (guilt, shame, belief of unfair tax burdens –Guilt and shame proxied by disapproval of family and friends (Table 6). How much others are evading (Table 7). –Direct morality question (Table 8)

Table 6: Size of UE versus family reaction

Table 7: Size of UE versus frequency of evasion

Taxes and evasion Theoretical literature ambiguous on effects of taxes on evasion. Czechs and Slovaks diverged in their tax policies after Czechs evade more intensively than Slovaks though their rates are lower. Slovaks evade more extensively.

Justifying the twins assumption Similar languages and demographics and economies at split. –Main difference since then is income and this can confound our findings on taxes –Multivariate analysis suggests income (as proxied by age and education) has an effect.