**Research Goals:** NT and SARS asked FIAS to make use of the survey data to answer a number of questions about the formalization of informal firms, including the following (for details about analytical methods, see Annex 1):

- What are the characteristics of the 12% of formal firms who reported they had operated for some time before registering with SARS?

- What are the characteristics of the informal firms who reported they are considering registering with SARS?

- Is there a “bridge” that can be found between informal and formal firms?

- What do informal firms know about their tax obligations?

- What are some of the key attitudes of informal firms that may be related to their decisions about formalizing and registering with SARS?

The structure of this paper is as follows. After this introduction, Part 1 provides a summary of the relevant international tax compliance research; Part 2 describes the main survey findings and Part 3 contains conclusions and policy implications.

# **1.  Literature Review**

The original assumptions about tax compliance were rooted in standard analyses of maximization of expected income, taking into account the risks and penalties associated with non-compliance (Allingham and Sandmo, 1972).However, empirical data quickly revealed that taxpayers throughout the world paid much more tax than could be accounted for even by the highest feasible levels of auditing, penalties and risk-aversion. The question therefore switched from “why do taxpayers evade” to “why do taxpayers comply?” (Alm, et al..1992, 2003).

The more recent literature on tax compliance has taken into account economic theory, experimental design, and survey results. While much of the analysis has focused on individual taxpayers, the behavior of business taxpayers (including the self-employed and small business owners as well as managers of joint-stock companies) should probably be similar, and if anything the “elasticity” of tax compliance to the tax burden for business taxpayers should be probably higher than for individuals. Capital has long been documented as the most mobile among the main factors of production. Thus, Tiebout (1956) pointed out that taxpayers can “vote with their feet” by migrating between different jurisdictions, so governments throughout the world must take note that much investment can be “footloose” and that overly heavy tax burdens can deter investment – either encouraging it to search for locations that offer the highest expected after-tax rate of return or discouraging entrepreneurship in favor of wage labor. See also OECD Guidance Note on Tax Compliance (2004).

The OECD (2001) describes the use of surveys to gather evidence on tax compliance, and points out that their strengths include “their ability to capture a broad range of explanatory variables known only to taxpayers, notably their understanding of compliance requirements, relevant values and attitudes, expectations of risks and benefits of non-compliance ... [while disadvantages include] variations in definitions of issues such as non compliance, the integrity of the answers for deliberate or inadvertent reasons, and the inability to report on inadvertent omissions.” 3