Tackling the participation of Europe’s rural population in the shadow economy

Abstract

To tackle the shadow economy, an emergent literature has called for the conventional rational economic actor approach (which uses deterrents to ensure that the costs of engaging in shadow work outweigh the benefits) to be replaced or complemented by a social actor approach which focuses upon improving tax morale. To evaluate the relevance and validity of doing this in rural areas, we here report face-to-face interviews conducted with 9,677 rural dwellers conducted across the 28 member states of the European Union (EU28) in 2013. Multilevel logistic regression analysis reveals that both approaches significantly reduce the rural shadow economy. When tax morale is high, however, deterrence measures have little impact on reducing the rural shadow economy and it is only when tax morale is low that raising the level of deterrents has greater impacts, with increasing the risks of detection (which is problematic in dispersed rural populations) leading to higher reductions in the rural shadow economy than increasing punishments. The paper thus concludes by calling for greater emphasis in rural areas on improving tax morale to tackle the shadow economy in Europe and beyond.