Impact of Institutional Environment Quality on Tax Evasion: A Comparative Investigation of Old Versus New EU Members

This paper aims at comparatively investigating the impact of institutional environment quality (IEQ) on tax evasion in old (pre-2004) and new (post-2004) European Union (EU) member states. IEQ is measured by the World Bank's Worldwide Governance Indicators, which include voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption. The size of shadow economy is used as a proxy for tax evasion. Using a linear mixed model to analyse the data, the results indicate a higher level of tax evasion in new member states compared to the old ones and reveal that tax evasion is decreasing in the old, albeit at a lower rate compared to the new EU members. Overall, there is evidence that the impact of IEQ on tax evasion is different between the two groups. While regulatory quality, voice and accountability, control of corruption, political stability and government effectiveness are significant determinants of tax evasion levels in older EU members, government effectiveness is the only significant factor in the new EU member states