How to boost tax compliance and tax morale in Serbia?

Abstract

Shadow economy in Serbia is estimated at approx. 31% of GDP, which is by one sixth above the Central and Eastern Europe (CEE) average, suggesting that tax compliance and tax morale in Serbia are low, with severe effects on public finances sustainability, quality of goods provided by the public sector, and doing business environment. This paper examines the factors of high shadow economy, i.e. the drivers of low tax compliance in Serbia compared to other CEE countries, and identifies key elements of the effective strategy aimed at boosting tax compliance and tax morale. Tax compliance decision depends on fundamental factors (level of taxes, penalties and probability of detection), as well as on other factors shaping taxpayers' willingness to pay taxes voluntarily (tax morale). The results suggest that the level and structure of tax burden, along with the tax penalties policy in Serbia do not differ significantly from other CEE countries, while probability of detection of non-compliance is most likely lower than in other countries. In terms of tax morale drivers, Serbia performs as good as other CEE countries in terms of tax compliance costs, while frequent tax amnesties and low quality of public goods and services (compared to other CEE countries) have adverse impact on tax morale and tax compliance. Effective strategy to boost tax compliance and tax morale should entail a thorough reform of the Tax Administration, credible commitment that tax amnesties will not be repeated and a set of measures aimed at improving the quality of basic goods and services provided by the public sector.