Tax Evasion, Black Activities and Deterrence in Germany: An Institutional and Empirical Perspective

The traditional theory of tax evasion stresses the importance of deterrence for individual tax compliance. The higher expected punishment as the product of fines and the probability of detection, the lower tax evasion is hypothesized. Empirical evidence on this relation is in general scarce, particularly when it comes to field data, and there is not much evidence outside the U.S. Still, deterrence measures appear to be the most favored policy instruments in almost all OECD countries. In this paper, deterrence measures in Germany are considered as explanations for the size of the German shadow economy or tax evasion. Based on an overview of the legal environment of tax evasion, the recent deterrence policy of the federal government is discussed and a first econometric analysis on the impact of deterrence on the size of the German shadow economy is conducted using Granger causality tests and OLS regressions.