1. Quality of Government Services and Civic Duty to Pay Taxes in the Czech and Slovak Republics, and Other Transition Countries Jan Hanousek, Filip Palda The Informal Economy in the EU Accession Countries, Sofia, November 29-30, 2002

2. 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.

3. Instrumentality of tax evasion The instrumental models of tax evasion predict more tax evasion than we observe. The chances of being caught evading taxes in the U.S. are minuscule [1.5% of returns are audited and a small fraction of these are subject to penalty]. However, the majority of Americans choose to pay their taxes in full

4. Main contributions First survey of tax evasion related to the quality of the government services in Czech and Slovak Republics Follow-up of a similar retrospective survey [Hanousek, Palda 2002], which measured the size of UE

5. Method Tabular analysis of a survey of more than a thousand Czechs and five hundred Slovaks in year 2002 (2000). Demographics, attitudes to evasion, extent of evasion

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

7. Table 1. “Soft” measures of participation in UE 2002 survey results 2000 survey results

8. Table 2: Engaged in the undeclared sector? Czech Republic

9. Table 2: Engaged in the undeclared sector? Slovak Republic

10. Table 3. Ranges of undeclared income 2002 survey results

11. Comparison to stylized facts In demographic tendencies in conformity with past work –Men, especially married men, evade more (2000) –Evasion drops at retirement age –No clear relation between evasion and education –Unemployed, self-employed evade more

12. Stylized facts Morals -- guilt, shame, belief of unfair tax burdens –Guilt and shame proxied by disapproval of family and friends (Table 4). –Direct morality question (Table 5) –Direct question to quality of government services (Table 6) –Morality of evasion versus quality of government service (Table 7)

13. Table 4: Tax evasion versus family reaction 2002 survey results

14. Table 5: Tax evasion versus morality index 2002 survey results

15. Tbl. 6: Evasion and quality of government services 2002 survey results

16. Tbl. 6: Evasion and quality of government services 2002 survey results

17. Tbl. 7: Morality and quality of government services 2002 survey results

18. Overall assessment

19. Summary of the results people who think well of their government are more inclined to pay their taxes than are people who bear a grudge against the state. The only possible discrepancy - corruption question. We could also surmise that those who see corruption as a major problem could also be those who would like to evade taxes but who do not have ability or knowledge to bribe tax officials.

20. Main result 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.