The informal sector in transition: Tax evasion in an institutional vacuum

This thesis discusses the informal sector mainly focusing on the study of tax evasion. Individuals' decision whether or not to evade taxes is the core of the studies presented here. The role of institutions in this individual decision is considered to be of crucial importance. As a natural consequence, the research is predominantly micro-economic. Two empirical methods are used to study the compliance decision. The first is the experimental method and the second consists of a large field survey based on written questionnaires and personal contacts. Focusing on two cases, Albania (a country in transition) and the Netherlands (a developed country), an important outcome is that there are significant country and group differences with respect to tax compliance. This supports one of the main arguments in this thesis, which is that the informal sector in a developed country differs in many significant ways from the informal sector in a country in transition. The distinct relationship between formal and informal institutions is argued to be an important element in these country differences. Given that differences in institutions in Albania and the Netherlands are controlled for in the experiments and tax evasion outside of the laboratory is higher in Albania, this book provides evidence that the different levels of tax evasion in the two countries are not attributable to different tax norms and attitudes, but to different formal institutions (e.g., tax institutions) and their 'informal use' by individuals.