Taxing cultures and Tax Dile m mata not only in Transition Economies Heidelberg 18.06.2015.

1. TaxingculturesandTax Dilemmata notonlyinTransitionEconomiesHeidelberg 18.06.2015. Dr Péter Darák ELTE Budapest

2. Economicview of non-observed economy • „incomings whichfall out arenotsocialcostsas a whole, but more transferswithinthesociety, and causeonlycoststhroughtheirdistortions” /Collard 1989 • „Theoreticallytaxevasioncouldenhancewelfare, correctingthetohightaxratingstooptimalstandards” /Davidson 2005 • „The economiccrisis has givengovernmenttheimpetustotakeonEurope’smassiveshadowseconomy” /Schneider 2013

3. Specialities in Eastern Europe • Long period of transformationto market economyinthe ‘70-s, ‘80-s. („Secondeconomy” – jointventuresinindustry and trade, individualhomeactivityinagriculturewere more or less legal!) • But: profit maximizing strategyinstead of a long-term orientated view • Controversialconnectiontothe „firsteconomy”

4. What is the „non-observed” economy? I. Hidden, illegal, informal sector: • unreported income arising from legal activities (undeclared tips, not reported professional services) • income from illegal activities (unlicensed production of tobacco, alcohol, illegal production of drugs, prostitution)

5. What is the „non-observed” economy? II. • Production of goods for own use (private consumption of commercial production) • A „statistical underground” reflecting shortcomings in statistical techniques and information sources (childcare at home, private household services, other personal)

6. Extent of black economy • Estimated: 5%-32% of the GDP inEU Member States • 15-32% inEastern-Europe • Insomesectorsexceeding 30% (e.g. construction) • Highinmanufacturing (15%), whole-sale and retail (20%), hotels and restaurants (19%), agriculture (15%) • No grayzone: financialsector • 60-80% of theestimatedtaxgap is attributedtosmall business and self-employed entrepreneurs

7. Factorsinfluencingtaxpayerbehaviour • Deterrence • Norms • Opportunities • Fairness • Economic factors • Interactions

8. Deterrence • Risk of detection and/or severity of punishment • Deterrence is more effective where strong social norms exist • Communication plays a critical role

9. Norms (Drivers), opportunities • Personal willingness and social motivation • Normative messages • How high is the possible gain of the transaction? (too high taxrates… 1% increase in the tax charge results in an 8% increase in concealed income) • To limit chances • Regular legislative amendments

10. Fairness of therevenue body, economic factors • Distributive fairness • Procedural fairness • Fairness in punishment • Wide spectrum of conventional and not acceptable behaviour in different economic sectors

11. Interactions • How do the various drivers of compliance behaviour interact with each other? • Controlling and supportive approaches • Increase of tax burden (35-38%) and tax moral (22-25%) can change the size of black economy principally /Schneider 2012

12. New risks • Domestic and off-shore locations • The growth in e-commerce • Internet-related electronic payment systems • Mobile payment services • (e.g. tax moral of poker players)

13. Old-style risk management • Comprehensive research • Enhanced risk detection processes • Set of risk treatment (different handling of „risk takers”, „rule breakers” and organised crime)

14. New approaches(?) • Comprehensiveindustry benchmarking • Industry-basedwitholding/thirdpartyreportingregimes • Korea’slottery • Increasedsurveillance ofcash transactions • Increasedrecord-keepingauditsinhigh-riskindustrysectors • Collectedsuspicioustransactionsreports • Educatingnew/potentialtaxpayers

15. Specialities in Eastern Europe • „Invoicefactory” (Invoicemill) • „Oilblonding” cases(illicit import and trade of oilproductsinthe ‘90-s whichensureda highadditional profit fororganisedgroups) • Great number of workerson minimum wages (theygetadditional cash inhandfromemployers) • Corporationsarewillingtoemploypeoplewhohave a trade licenseas self-employed entrepreneurstoavoidsocialsecurity contribution

16. Typicalforms of taxevasionin Hungary • Cash-in-hand inemployer-employeerelation • Unreportedsales and servicesby entrepreneurs • Counterfeitcontractsfor more favourabletax rates (capitalincome is taxedless than employmentincome) • Overclaiming of expenses • Deduction of householdexpenses (maintenanceofcar) asexpenditure

17. New methods of government I. • HU: Online cashier’s desk connected to the revenue service, Transport registration (EKÁER- system), tax amnesty for hidden income • SLO: photographed cash receipts • F: suspicious transaction reporting, presumption of income on the basis of lifestyle

18. New methods of government II. • Spain: monitoring theuseof high-value euro banknotes, reporting of electricityconsumption • Ireland: name and shame, „coldcalls”, reducedrates of whitholdingforcomplianttaxpayers • South-Korea: Lotteryfor cash receipts(prizerewardsupto 10,000 $) • Japan: BlueReturn System – taxreturnsforaccurate accounting books

19. New methods of government III. • Sweden: code of conduct project for construction sector • Denmark: fair-play initiative • Belgium, Bulgaria,Denmark, France, Greece, Italy, Slovakia, Spain: restricted large cash payments

20. Conclusions I. • Taxevasion is a part of modern economy. (Notalwaysnegative! Illicitworkcanhelptosurvivebadsituationsforunemployedpeople, cancreatenewjobs. Keepsalive businesses whichwouldhaveto go bankruptbecause of highdepts, taxburdens) • Lookforreasons and causes • Useregulatinginstruments, makeimpactanalysis • Reduceover-taxation • Improvethetaxmoral

21. Conclusions II. Make sure that severe punishment is inevitable for illicit activity, but treat different: - crimes as not economical activity (arms dealing, drug trafficking) - economic crimes (fictitious VAT reclaims, failure to pay taxes) - tax compliance deficits in the framework of legal economic activities

22. The future of the hidden economy • Connected to future of cash? • All methods can be tried and used • More influence to citizens: This control can be very strong