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Rose-Ackerman (1978) sees corruption as a public choice, making widespread corruption a symptom instead of a disease per se. Eliminating corruption makes no sense if the result is a rigid, unresponsive autocratic government. A transaction-cost interpretation of corruption in the third world countries is provided by Husted (1994). Macre (1982) considers corruption under the game theory approach concluding that although different methods might limit corruption there is no real solution to eliminate this problem.

According to Husted (1999), corruption is strongly related to the cultural dimension developed by Hofstede (1997). Alam, (1995) and Macrae, (1982) relate the level of economic development and level of governance based on that economic development as an important contributor to corruption. Moutos and Tsitsikas (2010), argue that, in Greece, tax evasion is the answer to corruption considered that citizens are not provided with the public goods and services for which they have paid through taxes. Some key conclusions of the literature review are that, taxpayers who live in a community where tax evasion is a norm, have the tendency to evade taxes even more (Alm et al., 2013), on the other hand, tax compliant individuals view tax evasion as highly immoral. Furthermore, past research finds that, in societies with a stronger social and moral cohesion, tax avoidance and shadow economy is lower, also social norms are a critical factor of tax compliance.

Tax burden and tax admiration efficiency: There are two measures related to tax burden and tax administration efficiency in the model, that according to the study of Bame-Aldred, Cullen, Martin, and Parboteeah (2011), did not have significant influence on tax evasion in USA but should be considered on international level. The discussions on corruption, tax evasion, shadow economy, tax burden, and tax

administration efficiency leads to the following hypotheses:

Hypothesis 1. The higher the corruption level (or the lower the quality of government in a country), the bigger is the size of the shadow economy (higher the level of tax evasion) in that country.

Hypothesis 2. The higher the tax burden in a country, the bigger is the size of the shadow economy (higher the level of tax evasion) in that country.

Hypothesis 3. The better (effective and efficient) tax administrations in a country, the smaller is the size of the shadow economy (lower the level of tax evasion) in that country.


Data The data for this research are collected from different public sources such as: OECD Tax Administration report for 2010; Transparency International (2010). Corruption Perceived Index.; Tax Justice Network (2011). A briefing paper on the cost of tax evasion worldwide.

World Bank Data and Research.

Sample: The sample consists of 50 countries (see Table 1) including both developed and developing countries form different cultures and geography. The countries chosen, have all available scores for size of the shadow economy, corruption perception index (CPI), tax burden level, tax system evaluation by OECD and GDP per cap.

GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 421 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 Table 1: List of Sample Countries (N=50) With Corruption Index Perception Source: http://www.transparency.org The research design of Tsakumis et al. (2007) and Richardson (2008), that studied the relation between culture and tax evasion, were used as base models.

Independent Variables: The independent variables designated in this study are presented below: Corruption level (gl): measured by the corruption perception index (CPI) provided by Transparency International since

1995. The data of 2010 for CPI was used as presented in the Table 1 above. The highest scores which show better governance level (the least corrupt countries) are Denmark, New Zealand, and Singapore. Russia, Indonesia, and Argentina are the most corrupt. As independent variables are used tax burden (tb) measured by the report of Tax Justice Network (2011) and tax administration efficiency (ts) measured by the report of OECD (2011) Control Variable: According to Tsakumis et al. (2007), the size of the shadow economy in a certain country is influenced by its level of economic development. Similar expectations were built also in this model for the level of income and tax evasion. GDP per capita was used similarly to Tsakumis et al. (2007), as a control variable.

Dependent Variable: Our hypotheses relate to the impact of corruption, tax burden, and tax system efficiency on the size of the shadow economy. In his study, Schneider (2004) defines the shadow economy, not including here the criminal activity, as all the legal production of goods and services that are intentionally hidden. The shadow economy measure for the countries being evaluated in this study is reported as a percentage of the gross domestic product (GDP). Countries with larger size of shadow economies are considered as less tax compliant countries. The estimations of Tax Justice Network (2011) for the shadow economies of each country were used.

GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 422 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 Model Specification: The standard model consists of independent variables and control variables.

According to the hypotheses, the following model was constructed:

shadowecon = a0 + a1gl + a2tb + a3ts + a4gdpcap + ei


Descriptive statistics: The data for the complete sample of the 50 countries was analyzed using SPSS and the results of the descriptive statistics are shown on Table 2. Significant diversity with regard to corruption levels exists between countries. Also, the other variables of primary interest show considerable variance.

Table 2: Descriptive Statistics

The results of the multiple regression analysis are shown in Table 3. Based on this analysis, the model is considered significant (F = 14.755, p.0001), the independent variables such as corruption and tax burden are able to explain a relatively high percentage of variation (adjusted R2 of.529) in the dependent variable of shadow economy. Hypothesis 1 predicted that higher corruption is related to bigger size of shadow economy (tax evasion) across countries. The regression coefficient for governance level is negative and significant (p =.002). Therefore, I conclude that higher corruption level is related to higher tax evasion or to a bigger size of shadow economy.

Table 3: Regression Results

Hypothesis 2 predicted that higher Tax burden is related to a bigger size of shadow economy (tax evasion) across countries. The regression coefficient for Tax burden is positive and moderately significant (p =.032).

Results show that tax burden does influence tax evasion especially in developing countries or simply as a response to oppressive tax rates (Cebula, 1997). Hypothesis 3 predicted that better (effective and efficient) GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 423 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 Tax administration is related to a smaller size of shadow economy. The regression coefficient for Tax system is negative and not very significant (p =.082), showing that fiscal reforms and better fiscal tax administration will not drastically impact the shadow economy and tax behavior as long as also corruption behavior of government representatives remains unchanged.

Control variable: Figure 1 below, reports a relatively significant relation (p.079) between the level of income per person (GDP/cap) and the size of the shadow economy in different countries. The coefficient of the regression for GDP/cap is negative, which indicates that a higher level of income is associated with a lower size of the shadow economy.

Figure 1: Predictors Effects

Discussion: Alm and Torgler (2011) recommend a comprehensive range of governmental policies (including fiscal and anti-corruption) that can contribute to a change in the tax compliance attitude of the tax payers, reducing the shadow economy of a certain country. These policies consist of the use of media in order to emphasize the ethical aspects of tax evasion and to increase the social and community pressure on tax evaders; putting an end to policies that send mixed signals on the acceptability of the tax evasion, such as tax amnesties; underlining the direct link between the public services, tax revenue and tax compliance; the active use of a number of governmental agencies and organizations in the fight against corruption in order to further strengthen compliance based on tax moral and ethical behavior; and addressing perceived inequalities between politicians and citizens.

These policies and measures have been implemented successfully in many countries. As mentioned by Lenter et al. (2003), in Norway, Sweden, and Finland personal tax filings are publicly available. In U.S., according to Gray (1999), the prosecutors issue a press release when a tax evader is convicted and sentenced in order to increase the awareness of the public for tax non-compliance. Additionally, in California, the names of the top 500 taxpayers that have been convicted for tax fraud are published online. Lenter et al.

(2003), provide similar evidence from New Zealand, where the names of tax evaders are made public on the regular publications of the “Tax Evaders Gazette” by the Commissioner of Inland Revenue. Torgler, (2004) bring evidence from India that in 1997 engaged marketing companies to use moral appeal to decrease tax evasion. They also launched a web site to receive report for tax evasion or corruption cases that received approximately 22,500 reports from 2010 two 2012. This strategy was used to publicly reward honest officials and also increase arrests and convictions for non-compliant and corrupt behavior. In Philippines GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 424 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 were recruited 1 million scouts to conduct inspections and report tax evaders. The purpose of policies described above is to establish moral norms and enforce moral cost, using social pressure, and ultimately teach a culture of fiscal compliance. Normally, building tax morale through similar measures requires time to produce effects, but it will create lasting results, and it can also improve the effectiveness of standard enforcement practices.


This study investigated the influence of corruption on the size of the shadow economy across 50 countries.

The results of this research support the general proposition that corruption is a significant factor in explaining shadow economy and tax evasion levels across countries. This research was motivated by difficulties that the Balkan Counties are experiencing with corruption and tax evasion problems. It was provided empirical evidence and explanation for the vicious circle of tax evasion and political corruption in which many developing countries and sometimes even developed countries often fall into. To this extent, it was revealed that effective tax administration has a certain effect over the rates of evasion, but cannot eliminate the problem. The results of this paper are in accordance with the arguments presented in literature by Alm (2012), that considers “trust” as one of the very important paradigms for governmental policies. Accordingly, individuals are more likely to respond either to enforcement or to tax services if they believe that the tax administration is honest; that is, “trust” in the authorities can have a positive impact on compliance. However, the process of establishing trust in countries with a high corruption level is very difficult in practice. Therefore, these results can explain the failure of standard polices in eliminating corruption and tax evasion and the difficulty that many governments meet when trying to face these issues.


Alam, M.S. (1995). A theory of limits on corruption and some applications. Kyklos, 48: 419-35.

Alm, J., Bahl, R., & Murray, M. N. (1990). Tax structure and tax compliance. The Review of Economics and Statistics, 72, 603–613.

Alm, J., & Torgler, B. (2006). Culture differences and tax morale in the United States and in Europe.

Journal of Economic Psychology, 27, 224–246.

Alm J., and Torgler, B., 2011. Do ethics matter? Tax Compliance and Morality, Journal of Business Ethics 101, 635-651.

Alm, J., (2012).Measuring, explaining, and controlling tax evasion: Lessons from theory, experiments, and field studies. International Tax and Public Finance 19, 54–77.

Alm J., Bloomquist, K. M., and McKee, M., 2013. When you know your neighbor pays taxes:

Information, peer effects, and tax compliance," Working Papers 13-22, Department of Economics, Appalachian State University.

Alley, C., & James, S. (2006). Research into economic and behavioural approaches in tax compliance. In A. Sawyer (Ed.), Taxation Issues in Twenty-First Century (pp. 3-14). Christchurch: The Centre for Commercial and Corporate Law, School of Law.

Allingham, M. G., & Sandmo, A. (1972). Income tax evasion: a theoretical analysis. Journal of Public Economics, 1, 323-328.

GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 425 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 Bame-Aldred, C. W., Cullen, J. B., Martin, K. D., & Parboteeah, K. P. (2011). National culture and firmlevel tax evasion. Journal of Business Research, In press.

Cebula RJ. (1997). An empirical analysis of the impact of government tax and auditing policies on the

size of the underground economy: the case of the United States, 1973–94. Am J Econ Social 1997;56(2):


Gray, C., 1999. United States practices in estimating and publicizing tax evasion. Discussion Paper Number 15, Harvard Institute for International Development.

Hofstede, G. (1997). Cultures and organizations: Software of the mind. New York, NY: McGraw Hill.

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