Abstract
Empirical research about tax evasion and the informal economy has exploded in the past few decades, seeking to shed light on the magnitude and (especially policy) determinants of these phenomena. Quantitative information informs the analysis of policy choices, enables the testing of hypotheses about determinants of this phenomenon, and can help with the accurate construction of national income accounts. Even as empirical analysis has burgeoned, some have expressed doubts about the quality and usefulness of some prominent measures. The fact that high-quality data is elusive is neither surprising nor a coincidence. The defining characteristic of tax evasion and informal economic activity—that they are generally illegal—often renders unreliable standard data collection methods such as surveys. Unlike invisible phenomena in the natural sciences, these invisible social science phenomena are hard to measure because of choices made by individuals. Analysis of tax evasion and the informal economy must proceed even in the absence of the direct observability of key variables, and theory should guide the construction and interpretation of evidence of the “invisible.” In this paper, we address what can be learned using micro or macro data regarding tax evasion and the informal economy under given conditions and assumptions, and critically review some of the most common empirical methods in light of our conclusions. We conclude with an entreaty for researchers in this field to enlist in the “credibility revolution” (Angrist and Pischke in J. Econ. Perspect. 4(2):3–30, 2010) in applied econometrics.
Article PDF
Similar content being viewed by others
Avoid common mistakes on your manuscript.
References
Alexeev, M., & Pyle, W. (1972). A note on measuring the unofficial economy in the former Soviet Republics. Economics of Transition, 11(1), 153–175.
Allingham, M., & Sandmo, A. (1972). Income tax evasion: A theoretical analysis. Journal of Public Economics, 1(3–4), 323–338.
Alm, J., Jackson, B., & McKee, M. (1992). Institutional uncertainty and taxpayer compliance. The American Economic Review, 82(4), 1018–1026.
Alm, J., Bloomquist, K., & McKee, M. (2010, in progress). On the external validity of tax compliance experiments.
Andreoni, J., Erard, B., & Feinstein, J. (1998). Tax compliance. Journal of Economic Literature, 36(2), 818–860.
Angrist, J. D., & Pischke, J.-S. (2010). The credibility revolution in empirical economics: How better research design is taking the con out of econometrics. The Journal of Economic Perspectives, 4(2), 3–30.
Beron, K. J., Tauchen, H. V., & Witte, A. D. (1992). The effect of audits and socioeconomic variables on compliance. In J. Slemrod (Ed.), Why people pay taxes (pp. 67–89). Ann Arbor: University of Michigan Press.
Breusch, T. (2005). Estimating the underground economy using MIMIC models. http://129.3.20.41/eps/em/papers/0507/0507003.pdf.
Chandola, V., Banerjee, A., & Kumar, V. (2009). Anomaly detection: A survey. ACM Computing Surveys, 41(3).
Charmes, J. (2006). Measurement of the contribution of informal sector/informal employment to GDP in developing countries: Some conceptual and methodological issues (Expert Group on Informal Sector Statistics (Delhi Group) Paper No. 1).
Christensen, K., Cline, R. J., & Neubig, T. J. (2001). Total corporate taxation: Hidden, above-the-line, non-income taxes. State Tax Notes, 21, 525–531.
Clotfelter, C. (1983). Tax evasion and tax rates: An analysis of individual returns. Review of Economics and Statistics, 65(3), 363–373.
Cummings, R. G., Martinez-Vasquez, J., McKee, M., & Torgler, B. (2009). Tax morale affects tax compliance: Evidence from surveys and an artefactual field experiment. Journal of Economic Behavior & Organization, 70, 447–457.
Dell’Anno, R., & Schneider, F. (2006). Estimating the underground economy by using MIMIC models: A response to T. Breusch’s critique (Working Paper No. 0607). Department of Economics, Johannes Kepler University of Linz.
DePaula, A., & Scheinkman, J. (2011). The informal sector: An equilibrium model and some evidence from Brazil. Review of Income and Wealth, 57(s1), s8–s26.
Feige, E. L. (1990). Defining and estimating underground and informal economies: The new institutional economics approach. World Development, 18(7), 989–1002.
Feinstein, J. (1991). An econometric analysis of income tax evasion and its detection. The Rand Journal of Economics, 22(1), 14–35.
Feldman, N., & Slemrod, J. (2007). Estimating tax noncompliance with evidence from unaudited tax returns. Economic Journal, 117(518), 327–352.
Fellner, G., Sausgruber, R., & Traxler, C. (2011, forthcoming). Testing enforcement strategies in the field: Threat, moral appeal and social information. Journal of the European Economic Association.
Frey, B., & Weck-Hanneman, H. (1984). The hidden economy as an ‘unobserved’ variable. European Economic Review, 26(1–2), 33–53.
Gërxhani, K. (2004). The informal sector in developed and less developed countries: A literature survey. Public Choice, 120, 267–300.
Glazer, A., & Konrad, K. (1996). A signaling explanation for charity. The American Economic Review, 86(4), 1019–1028.
Gordon, R., & Li, W. (2009). Tax structures in developing countries: Many puzzles and a possible explanation. Journal of Public Economics, 93(7–8), 855–866.
Henderson, J. V., Storeygard, A., & Weil, D. N. (2009). Measuring economic growth from outer space (NBER Working Paper 15199).
Hurst, E., Li, G., & Pugsley, B. (2010). Are household surveys like tax forms: Evidence from income underreporting of the self-employed (NBER Working Paper 16527).
Hussmanns, R. (2004). Measuring the informal economy: From employment in the informal sector to informal employment (Working Paper No. 53) International Labour Office Policy Integration Department.
Johnson, S., Kaufmann, D., & Shleifer, A. (1997). The unofficial economy in transition. Brookings Papers on Economic Activity, 1997(2), 159–239.
Jütting, J. P., & de Laiglesia, J. R. (2009). Is informal normal? Towards more and better jobs in developing countries. An OECD Development Centre Perspective: www.oecd.org/document/32/0,3343,en_2649_33935_42024438_1_1_1_1,00.html.
Kaufmann, D., & Kaliberda, A. (1996). Integrating the unofficial economy into the dynamics of post-socialist economies: A framework of analysis and evidence (World Bank Policy Research Working Paper No. 1691).
Kleven, H. J., Knudsen, M. B., Kreiner, K. T., Pedersen, S., & Saez, E. (2011). Unwilling or unable to cheat? Evidence from a tax audit experiment in Denmark. Econometrica, 79(3), 651–692.
Lackó, M. (2000). Hidden economy—an unknown quantity? Comparative analysis of hidden economies in transition countries, 1989–1995. Economics of Transition, 8(1), 117–149.
LaLonde, R. J. (1986). Evaluating the econometric evaluations of training programs with experimental data. The American Economic Review, 76(4), 604–620.
Lemieux, T., Fortin, B., & Fréchette, P. (1994). The effect of taxes on labor supply in the underground economy. The American Economic Review, 84(1), 231–254.
Loayza, N. V. (1996). The economics of the informal sector: A simple model and some empirical evidence from Latin America. Carnegie-Rochester Conference Series on Public Policy, 45, 129–162.
Nigrini, M. J. (1996). A taxpayer compliance application of Benford’s Law. The Journal of the American Taxation Association, 18, 72–91.
OECD (2006). Tax administration in OECD and selected non-OECD countries: Comparative information series. Organisation for Economic Co-operation and Development: http://www.oecd.org/dataoecd/37/56/38093382.pdf.
OECD (2008). Tax administration in OECD and selected non-OECD countries: Comparative information series. Organisation for Economic Co-operation and Development: http://www.oecd.org/dataoecd/57/23/42012907.pdf.
Pissarides, C. A., & Weber, G. (1989). An expenditure-based estimate of Britain’s black economy. Journal of Public Economics, 39(1), 17–32.
Robinson, L., & Slemrod, J. (2010, forthcoming). Understanding multidimensional tax systems. International Tax and Public Finance.
Schneider, F. (2005). Shadow economies around the world: What do we really know? European Journal of Political Economy, 21, 598–642.
Schneider, F., Buehn, A., & Montenegro, C. E. (2010). New estimates for the shadow economies all over the world. International Economic Journal, 24(4), 443–461.
Shaw, J., Slemrod, J., & Whiting, J. (2010). Administration and compliance. In S. Adam, T. Besley, R. Blundell, S. Bond, R. Chote, M. Gammie, P. Johnson, G. Myles, & J. Poterba (Eds.), Dimensions of tax design: The Mirrlees review (pp. 1100–1162). London: Institute of Fiscal Studies and Oxford University Press.
Slemrod, J. (1985). An empirical test for tax evasion. Review of Economics and Statistics, 67(2), 232–238.
Slemrod, J. (2001). A general model of the behavioral response to taxation. International Tax and Public Finance, 8(2), 119–128.
Slemrod, J. (2004). The economics of corporate tax selfishness. National Tax Journal, 57(4), 877–899.
Slemrod, J. (2007). Cheating ourselves: The economics of tax evasion. The Journal of Economic Perspectives, 21(1), 25–48.
Slemrod, J., Blumenthal, M., & Christian, C. (2001). Taxpayer response to an increased probability of audit: evidence from a controlled experiment in Minnesota. Journal of Public Economics, 79(3), 455–483.
Stanley, T. J. (1995). Radar detectors, fixed and variable costs of crime. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=219.
Tanzi, V. (1980). The underground economy in the United States: Estimates and implications. Quarterly Review—Banca Nazionale Del Lavoro, 135(2), 427–453.
Tanzi, V. (1983). The underground economy in the United States: Annual estimates. IMF Staff Papers, 30(2), 283–305.
Thomas, J. (1999). Quantifying the black economy: ‘Measurement without theory’ yet again? Economic Journal, 109(456), F381–F389.
Torgler, B. (2007). Tax compliance and tax morale: A theoretical and empirical analysis. Cheltenhorn Glos: Edward Elgar.
Yitzhaki, S. (1974). A note on income tax evasion: A theoretical analysis. Journal of Public Economics, 3(2), 201–202.
Zellner, A. (1970). Estimation of regression relationships containing unobservable variables. International Economic Review, 11(3), 441–454.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Slemrod, J., Weber, C. Evidence of the invisible: toward a credibility revolution in the empirical analysis of tax evasion and the informal economy. Int Tax Public Finance 19, 25–53 (2012). https://doi.org/10.1007/s10797-011-9181-0
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10797-011-9181-0