Tackling the informal sector in East-Central Europe

To tackle participation in the informal sector, an emergent literature has called for the dominant deterrence approach, which increases the penalties and risks of detection, to be replaced and/or complemented by a tax morale approach that fosters citizens’ commitment to compliance. Applying logistic regression analysis to the results of a Eurobarometer survey of 11 EastCentral European countries reveals that, although both approaches reduce the likelihood of participation in the informal sector, deterrence measures reduce participation only when tax morale is low and have little impact when tax morale is high. The paper then discusses the policy implications of these findings.