Undeclared Economic Activity in Central and Eastern Europe : How Taxes Contribute and How Countries Respond to the Problem

Undeclared Economic Activity in Central and Eastern Europe : How Taxes Contribute and How Countries Respond to the Problem

The paper examines the incentives and distortions created by tax policy and administration structures that motivate individuals to undeclare or under-declare work in the new EU member countries. It analyses the tax level and the tax structure "...

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Bibliographic Details
Main Author:	Leibfritz, Willi
Format:	Policy Research Working Paper
Language:	English
Published:	2012
Subjects:	ADVANCED COUNTRIES ADVERSE EFFECT ADVERSE EFFECTS ALLOCATION OF CAPITAL ARREARS BARRIER BUSINESS INVESTMENT BUSINESS TAXES CAPITAL FORMATION CAPITAL GAINS CAPITAL INTENSITY CAPITAL TAX CASH ECONOMY CONSUMPTION TAX CONSUMPTION TAXES CORPORATE INCOME TAX CORPORATE TAXATION CURRENCY DEBT DEDUCTIONS DISABILITY PENSION DISPOSABLE INCOME DIVIDEND DIVIDEND TAXATION DIVIDENDS DOUBLE TAXATION ECONOMIC ANALYSIS ECONOMIC CRISIS ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMIC PERFORMANCE ECONOMIC REFORM ECONOMIC REFORMS ECONOMIC TRANSACTIONS EMPLOYMENT TAX EMPLOYMENT TAX CREDITS ENTRY BARRIERS EXPENDITURES EXPORT FINANCIAL ASSETS FISCAL DEFICITS FIXED INVESTMENT FLAT TAX FLAT TAXES FOREIGN FIRMS FORMAL ECONOMIES FORMAL ECONOMY FRAUD GOVERNMENT BUDGET GOVERNMENT BUDGET DEFICIT GOVERNMENT EXPENDITURE GOVERNMENT FINANCE GOVERNMENT REVENUES GOVERNMENT SPENDING HOUSEHOLD INCOME HUMAN DEVELOPMENT IMPLICIT TAX INCOME GROUPS INCOME LEVEL INCOME LEVELS INCOMES INFORMAL ECONOMIES INFORMAL ECONOMY INSURANCE INSURANCE PREMIUM INSURANCE PREMIUMS INTEREST INCOME INTERNAL CONTROL INTERNATIONAL BANK INTERNATIONAL BUSINESS INVESTMENT DECISIONS JOB CREATION LABOR MARKET LABOR MARKETS LOSS OF REVENUE MACROECONOMIC CONDITIONS MARGINAL TAX RATES MARKET COMPETITION MARKET CONDITIONS MARKET ECONOMY MARKET ENTRY MARKET REFORM MARKET REGULATIONS MONETARY FUND OPTIMAL TAXATION OUTPUT PAYROLL TAX PENSION PENSION CONTRIBUTION PENSION CONTRIBUTIONS PENSION REFORM PENSION SYSTEM PERSONAL INCOME PERSONAL INCOME TAX PERSONAL INCOME TAXES POWER PARITIES PRIVATIZATION PROPERTY RIGHTS PROPERTY TAX PROVISIONS PUBLIC PUBLIC EXPENDITURE PUBLIC EXPENDITURE REVIEW PUBLIC FINANCE PUBLIC FINANCE STATISTICS PUBLIC GOODS PUBLIC PROCUREMENT PURCHASING POWER REAL ESTATE RED TAPE REGULATORY FRAMEWORK REPLACEMENT RATES REPUTATION SALES TAX SALES TAXES SAVINGS SHARE PRICES SHAREHOLDERS SKILLED WORKER SKILLED WORKERS SMALL ENTERPRISES SOCIAL PROTECTION STATUTORY TAX STATUTORY TAX RATE STRUCTURAL PROBLEMS TAX TAX ADMINISTRATION TAX AVOIDANCE TAX BASE TAX BASES TAX BURDENS TAX CODE TAX COLLECTION TAX COLLECTORS TAX COMPETITION TAX COMPLIANCE TAX CREDIT TAX ENFORCEMENT TAX EVASION TAX EXEMPTION TAX INCENTIVE TAX INCIDENCE TAX LIABILITY TAX MEASURES TAX POLICIES TAX POLICY TAX RATE TAX RATES TAX REDUCTION TAX REDUCTIONS TAX REFORM TAX REFORMS TAX REGIME TAX REGIMES TAX REVENUE TAX REVENUES TAX SHIFTING TAX STRUCTURE TAX SYSTEM TAX SYSTEMS TAX TREATMENT TAX WEDGE TAX WEDGES TAXABLE INCOME TAXATION TAXES ON CONSUMPTION TAXES ON LABOR INCOME TAXPAYERS TRANSITION COUNTRIES TRANSPARENCY WITHHOLDING TAX WORLD DEVELOPMENT INDICATORS
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20111223221541 http://hdl.handle.net/10986/3691

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Summary:	The paper examines the incentives and distortions created by tax policy and administration structures that motivate individuals to undeclare or under-declare work in the new EU member countries. It analyses the tax level and the tax structure "mix" of tax instruments, the special taxation regimes set up to attract workers and entrepreneurs back into the formal economy and how tax policies such as the introduction of a "flat tax" on income from labor and capital impacted workers and entrepreneurs in terms of formalizing work. It also attempts to gain some insight into the effectiveness of tax administration by comparing some input and output measures As non-tax factors can amplify the adverse effects of taxes on the labor market and reduce the effectiveness of tax reform, some of these other economic framework conditions are also discussed. This paper concludes by refining the main results and possible best practices for tackling undeclared work. The paper argues that the new EU member countries have had mixed success tackling undeclared work. While taxation matters, other underlying conditions for formal sector activity are also important. Addressing the problem of undeclared work therefore requires a broad policy approach with further improvements in tax policies, tax administration, and in general economic framework conditions for formal sector activity.