Tax evasion and public governance before and after the European “big bang”: a red flag for policymakers
| DOI | https://doi.org/10.1108/JFC-04-2020-0064 |
| Published date | 18 June 2020 |
| Date | 18 June 2020 |
| Pages | 420-436 |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
| Author | Ahmed Emadeldin Yamen,Hounaida Mersni,Abdulhadi Ramadan |
Tax evasion and public governance
before and after the European “big
bang”:aredflag for policymakers
Ahmed Emadeldin Yamen
Department of Accounting, American University of the Middle East, Egaila,
Kuwait and Faculty of Business, Ain Shams University, Cairo, Egypt, and
Hounaida Mersni and Abdulhadi Ramadan
Department of Accounting, American University of the Middle East,
Egaila, Kuwait
Abstract
Purpose –The purpose of this study is to examinethe impact of public governance quality on tax evasion
levels in old (pre-2004) and new (post-2004) European Union (EU) members before and after the 2004 EU-
enlargement.
Design/methodology/approach –This study uses panel data of 28 EU countriesover the period 1996-
2015. Tax evasion is measured using an updated version of the shadow economy size based on the light
intensity,as calculatedby (Medina and Schneider,2018). The World Bank’s worldwide governance indicators
are used as a measure of public governance.
Findings –The results indicate thatnew EU members have higher tax evasion levels compared to theold
ones before and after the 2004 EU enlargement.The findings also report that the public governance quality is
superior in old members throughout the 1996-2015period. Furthermore, the authors found that after the EU
enlargement, tax evasionlevels decreased in both EU groups; however, the authorsnoticed an improvement
in the public governance quality in new members and a deterioration in old ones. Additional analysis
confirms the impact of public governance quality as an effective tool for reducing tax evasion behavior in
both EU groups beforeand after the EU enlargement.
Practical implications –The findings are potentiallyuseful for EU policymakers in identifying the most
effective tools thatcan minimize tax evasion levels in EU countries. Additionally,the results are alarming as
they show the negative consequencesof the EU enlargement in old EU members. Thus, policymakers should
consider them when settingtheir rules and regulations to reduce the significant differences between both EU
groups to preventmember states from potentially exitingthe EU.
Originality/value –To the best of the knowledge, this is the first study that examines the tax evasion
behaviorand public governance quality in the EU before and after the EU enlargement.
Keywords EU-enlargement, Tax evasion, Public governance
Paper type Research paper
1. Introduction
The European Union (EU) enlargement in 2004 is considered the most important event in
Europe in many years. It is called the “big bang”expansion, as many countries joined the
EU at the same period (Noutcheva and Bechev, 2008). The consequences of this event have
been an interesting topic for discussion in different fields and from different perspectives.
Recently, a growing body of research focused on the economic aspects of this political
transformation and confirmed that this big expansionsignificantly affected the countries in
terms of labor resources (D’Auria et al., 2008) and income distribution (Barrell et al.,2010;
JFC
30,2
420
Journalof Financial Crime
Vol.30 No. 2, 2023
pp. 420-436
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-04-2020-0064
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Breuss, 2010). Also, it is influencing the tax burden and tax morale of the EU members
(Torgler, 2011), which indirectly, have an impact on tax compliance and tax evasion
behaviors (Cummingset al.,2009).
The tax evasion has considerable economic costs that wouldharm the EU economy and
makes governments struggle (Janebaand Peters, 1999). Tax evasion in the EU is estimated
at 825 billion a year and, the percentage of tax-gap, calculated as a proportion of expected
tax revenue, varies from 7.98% in Luxembourg (old EU member) to 29.51% in Romania
(new EU member). These figures exceed thehealth spending in some states (Murphy, 2019)
and suggest that tax evasion levels are significantly different among old and new EU
members (Yamen et al., 2018).Since 2004, many new countries joined the EU that are mostly
from Eastern and Central Europe, including some Former Soviet Union countries. These
countries are generallycharacterized by a high level of corruption and tax evasion(Alon and
Hageman, 2013). Thus, it is important to comparatively examine the tax evasion behavior
between old and new EU members before and after the enlargement. To the best of our
knowledge, our work is the first one that considersboth periods in the analysis.
Economists showed that tax evasion is costly for the European economy; thus, it is
crucial to search for effectivetools to reduce it. Previous research shows evidence thata high
level of public governance quality is found to be a solution for the tax evasion problem
(Torgler and Schneider, 2009;Yamen et al.,2018). Yamen et al. (2018) report a negative
relationship between public governance and tax evasion in the EU. However, their
investigation covered the post-enlargement period of 2004-2014, which means they did not
consider the changes that have caused by the EU enlargement.Accordingly, our study aims
to fill this gap and to investigate the relationship between public governance and tax
evasion before and after the EU enlargement.
The empirical analysis is based on a panel dataof 28 EU countries over the period 1996-
2015. We divided these countries into two main groups; old members: countries that were
EU members before 2004 and new members: countries that joined the EU after 2004. With
regard to our variables, we used an updated version of the shadow economy based on the
light of intensity, calculated by Medina and Schneider (2018), as a proxy for tax evasion.
Additionally, we calculated a public governance score based on the World Bank public
governance indicators.Our findings indicate that the new EU members are characterized by
a high level of tax evasion and low qualityof public governance in both periods compared to
the old members. Furthermore,we observed a decrease in tax evasion levels in bothnew and
old members. Nevertheless, we noticed that the EU enlargement led to a decrease in the
quality of public governance in old membersand to an improvement in new ones. Also, our
results suggest that tax evasion behavior is linked to the quality of public governance and
this is confirmed in both periods (pre –and post-2004). However, our findings indicate that
the power of public governance as a tool to reduce the tax evasion behavior, in old EU
members, has been decreasing after the EU enlargement. Additional analysis of old EU
members data shows different public governance indicators being more effective in
compating tax evasion in the pre-enlargement compared to the post-enlargement period. In
fact, government effectiveness (GE), control of corruption (CC), regulatory quality (RQ) and
voice and accountability (VA) had a significantimpact on tax evasion before 2004, whereas,
after the enlargement, rule of law (RL) and political stability (PS) appear to be more
significant factors.
Our research makes the following contributions. First, we extend prior work related to
the EU enlargement by investigating the changes in terms of tax evasion behavior and
public governance qualitythat old and new EU members faced. Second, we examine the role
Tax evasion
and public
governance
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