Influence of Social Security Tax Reform on Shadow Economy: Unofficial Agreement and Conflict of Interests

Abstract

Public discussion around social security tax reform is mostly concentrated on the size of possible rate cuts. At the same time, game-theoretic analysis shows that the existing mechanism of tax collection and calculation stimulates tax evasion. The stimulating effect is based on the mutual interest of employer and employee in tax minimization schemes, which results in establishing unofficial agreements between them and formation of the social norm of common tax evasion. The analysis also shows that the negative influence of the tax can be minimized by transfering the social security tax from employer to employee. Such transfer results in an occurrence of the conflict of interests between the parties, which under certain conditions can cause formation of the social norm of common compliance with tax legislature.