Firm-level determinants of tax evasion in transition economies

Business tax evasion is an important issue for governments. Yet the factors that determine business tax evasion have not been sufficiently examined in the literature in general, and in transition contexts in particular. To address this gap, this study uses the WB/EBRD Business Environment and Enterprise Performance Survey (BEEPS) database with a sample of over 12,692 firms from 26 transition economies. Applying various modelling strategies, we argue that tax evasion is a function of firm-level and institutional-level variables. We contribute to the literature by providing robust evidence showing that the perceived tax burden has a positive impact on tax evasion. We also find that the tax evasive behaviour of firms is positively influenced by low trust in government and in the judicial system as well as by higher perceptions of corruption and higher compliance costs. We find that smaller firms, individual businesses and firms in sectors that are less visible to the tax administration are more likely to get involved in evasive behaviour. Overall, institutional factors play an important role in determining firms’ tax evasion behaviour in transition economies. This finding has important policy implications.     

Privatisation and Transition in Albania

This article considers the privatisation policy and its role in the transition to a market economy in Albania. The disintegration of the old regime took place over a much longer time than in other Central and East European countries, resulting in chaos and a political vacuum in which no systematic or effective policy could be formulated. The new government, committed to fundamental reforms necessary for a market economy, did not take power until after the second general election in March 1992. One outcome of this long pre-transition period was that the privatisation programme had to evolve gradually in the course of transformation, without ever having been planned in a comprehensive and integrated manner. Privatisation proceeded on five different fronts: small privatisation, privatisation of agriculture, housing, small and medium-sized enterprises and mass privatisation. The article discusses the progress of each aspect and provides up-to-date information and data on their progress. The privatisation of agriculture and housing were the most crucial aspects of the overall policy, with significant impacts on economic growth and the progress of the transformation programme. The privatised agricultural sector grew very rapidly and made a major contribution to pulling the whole economy out of the 'transformational recession'. Privatised housing created a significant wealth effect amongst the urban population, providing many of them with collateral or start-up capital. The privatisation of state-owned enterprises, however, was carried out with much more difficulty and controversy. Although auctions were to be the main method of transfer, ensuring a significant income for the treasury, in practice many enterprises were privatised through other methods, bringing in less income and giving rise to allegations of political favouritism. Another aspect of privatisation was the weak corporate governance mechanism which replaced state ownership. Many small and medium-sized enterprises (probably about half) were sold or transferred to their employees, without any outsider interest. The performance of this sector has to be monitored closely in order to assess the impact of massive insider privatisation, reminiscent of Russia's privatisation programme. Mass privatisation too, by distributing enterprise shares amongst the general public, resulted in the increased power of insiders. The shares of nearly 100 enterprises were transferred to the private sector over the first year of the implementation of this programme. Although the privatisation programme progressed very rapidly, no serious attention was paid to problems of corporate governance. Without concentrated ownership or the involvement of financial intermediaries to oversee and monitor the managers, it is unlikely that the expected efficiency gains will be realised. The political crisis resulting from the collapse of informal financial schemes brought the whole reform process, including the privatisation programme, to a halt in early 1997. It is expected that, with a new government in power, there will be a new push for reforms and an increased pace of privatisation. It is hoped that the renewed efforts will also deal with the shortcomings of the previous schemes-particularly the corporate governance issues.     

CAPTIVE FINANCE SUBSIDIARIES: OVERVIEW AND SYNTHESIS

A captive finance company is a wholly owned subsidiary whose primary business is to finance the sales of the parent's products and services. Despite the continued growth and long history of captive finance companies, the issue of the economic impact of forming a captive remains controversial. Some view captive finance subsidiaries as unnecessary structures that may actually reduce the value of the firm. Others hold that captives can produce benefits that will increase firm value. The primary purpose of this paper is to provide an overview of the finance academic literature and to suggest direction for future research.     

ON PREFERRED STOCK

Preferred stock is issued by many corporations in spite of its apparent disadvantages. This study explains why. A simple partial equilibrium model is presented in which preferred shares are both supplied and demanded. Stronger tax incentives in Canada than in the United States may create a positive preferred equilibrium. Empirical evidence on the relative use of preferred stock in the two countries is presented to support this hypothesis.     

Sustainable finance: A new paradigm

We argue that our current approach to shareholder wealth maximization is no longer a valid guide to creation of sustainable wealth: An emphasis on short-term results has had the unintended consequence of forcing many firms to externalize their social and environmental costs. An unwavering faith in markets' ability to efficiently uncover long-term value implications of short-term results has created many unacceptable outcomes. Given the social and environmental challenges ahead, such practices and their unacceptable outcomes cannot be sustained. Therefore, a shift in paradigm is called for. We propose a sustainable value creation framework, within which all social and environmental costs and benefits are to be explicitly accounted for.     

Fiscal performance and elections in the context of a transition economy

It is widely accepted that, in democratic societies, incumbent governments may use various means, such as discretionary spending, to increase their chances of re-election. In the context of potential budget constraints (e.g., large debt), the incumbent might consider alternative means. Tax collection performance could be one such means that is prone to incumbents’ electoral manipulation, particularly in transition countries with a weak institutional framework. Investigating Albania, we show that fiscal performance, measured by monthly tax revenues, is poor before elections, especially in elections that result in political change. Before all elections, we observe a reduction in tax collection ranging from 3.2 percentage points in the twelve months before elections to 4.0 percentage points in the six months before elections. This implies a drop of more than half in fiscal performance compared with its long-term “natural” or average rate. Moreover, the deterioration in performance is considerably larger, by two- to threefold, before “change elections” (i.e. elections that result in a change of the governing party). After these elections, fiscal performance improves. The key to reducing deterioration in fiscal performance associated with elections is to establish rules and institutional oversight (independent or bipartisan) that reduce the discretion of tax authorities.