The prevalence of informal economic activities represents a significant challenge for economies, as they tend to impede both the efficiency and equality objectives. The term “informal economy” refers to economic activities that are conducted legally or illegally outside the knowledge or control of government administrations. An increase in the informal economy can result in a number of adverse consequences, including the formulation of misguided political decisions based on inaccurate economic data, a deterioration in the competitive environment, ineffectiveness in the distribution of resources, damage to the sustainability of the social security system, budget deficits and an increase in borrowing duetoareductionintaxrevenues.Oneoftheeconomicreasonsfortheprevalenceofinformalactivities is the high tax burden. An examination of the effects of different taxes reveals that excessive taxation has a suppressive effect on the initiative of decision-making economic actors, restrains the expansion of the legal economy, and ultimately gives rise to tax hiding and the informal economy (Giriunien˙e, 2012, p. 823). The impact of the tax burden on informality is influenced by a number of factors, including the level of tax rates, the capacity to guarantee tax fairness, the frequency of tax amnesties and tax competition, which are among the defining characteristics of the tax system.

The aim of this study is to examine the impact of the tax burden,which is a crucial factor in economic decision-making, on the informal economy. The main hypotheses of the study are that the relationship between these two variables is non-linear and that the level of tax burden and the level of development are the determining factors in this relation. The primary focus of empirical studies is the examination of the tax burden as a significant factor influencing the prevalence of the informal economy. In these studies, the effect of the total tax burden is analysed (Macias, 2008; Enste, 2010; Manolas et al., 2013; Nagac, 2015, among others), as well as specific tax types, including social security contributions and the direct-indirect tax burden (Stankevičius and Vasiliauskait˙e, 2014; Kutbay, 2020; Yurdakul, 2008).

However, in contrast with the findings indicating a positive relationship, Elgin (2015) discovered that the tax burden increases in tandem with political stability and that there is a negative correlation between taxes and the informal sector. In studies that investigated the non-linear relationship, for example, Giles and Johnson (2002) concluded that the sensitivity of informality to the tax burden decreases when the effective tax rate falls below 25%. Dell’Anno and Adu (2020) demonstrated that there is no statistically significant correlation between government expenditure and the informal economy, and that this is attributable to the relatively low tax burden. The study conducted by Ünal (2021) revealed that the relationship between the tax burden and the informal economy varies according to the level of development of the countries that were the subject of the study.

This study investigates the relationship between the tax burden and the informal economy using a panel threshold regression model that covers the period from 1998 to 2020 for 10 BRICS-T countries. The sample group comprises the BRICS countries, which are regarded as rising powers, and whose number of members has increased to nine with the participation of Egypt, Ethiopia, Iran and the United Arab Emirates in the expansion in 2023, and Turkey, which applied for membership in 2024. The panel threshold regression model, as proposed by Hansen (1999), is based on the traditional least squares estimation method and is designed to investigate instances of a leap or structural break in the relationship between variables. Two models were constructed to determine the potential for a non-linear relationship, with the threshold effects of tax burden and development level investigated in each model. The ratio of the informal economy to GDP was employed as the dependent variable in the models, while the total tax burden was used as the explanatory variable. Additionally, real GDP per capita, the regulation index, and the inflation rate were incorporated as control variables. To avoid the issue of spurious regression in the estimations, it is essential that the variables employed in the model are stationary. In the initial stages of the analysis, the stationarity of the variables was examined using the Fisher type ADF (Choi, 2001) and PP (Phillips and Perron, 1988) tests. Subsequently, the linear fixed-effects model and the Hansen (1999) panel threshold procedure were applied.

The unit root test results indicated that the series were stationary at the levels, thereby satisfying the requirement for the panel threshold regression analysis. The results of the threshold effect test show that the first threshold value is statistically significant in both models, whereas the second threshold effect is not. In the subsequent phase of the analysis, the threshold values for the tax burden and per capita income were estimated. To estimate the coefficients, the traditional linear least squares method was initially employed. The estimations were made on the basis of the fixed effect model, in accordance with the results of the Hausman test. The results of the analysis demonstrate that the tax burden exerts a positive and statistically significant influence on the informal economy, with a statistical significance level of 1%.

The panel threshold regression analyses indicated that the impact of the tax burden on the informal economy decreased with the increase in the per capita income level, as evidenced by Model I. In other words, the sensitivity of informality to the tax burden decreases when the income level of countries rises above the determined threshold value. The results of Model II indicate that while the tax burden does not affect the informal economy when the tax burden to GDP ratio is below the threshold value of 15.3 percent, it increases informality when the tax burden exceeds the threshold value. This implies that the tax burden exerts a non-linear distorting influence on the informal economy. The results of the control variables confirm that the level of per capita income has a statistically significant negative effect on the size of the informal economy. Conversely, the inflation rate and the level of regulation have a positive effect, which is consistent with the results of the fixed-effects model in both models.

The analysis results show that the tax burden has a significant positive effect on informality, that this effect is not linear, and the effect occurs above a certain threshold value of the tax burden (15.3 percent). Therefore, the effect of the tax burden on informality differs in countries with a tax burden well above 15 percent, such as Brazil, Russia, South Africa, and Turkey, and in countries with a tax burden below 15 percent, such as Ethiopia and Iran. On the other hand, the effect of the tax burden on the informal economy is affected by the level of real GDP per capita, and the negative effect of the tax burden decreases at income levels above the threshold value. In other words, it is understood that taxpayers are less willing to evade taxes at income levels above the threshold value, and the negative effect on the informal economy is greater when the per capita income level is low. As a result, a high tax burden and a low per capita income level increase the sensitivity of taxpayers to the tax burden. The findings also offer insights into the optimal taxation strategy.

The non-linearity of taxpayers’ responses to the tax burden demonstrates the existence of a vicious circle regarding tax revenues in developing countries. Attempts to expand public revenue through increased taxation prompt taxpayers to shift their activities to informal areas, thereby preventing the anticipated revenue growth. A comparable phenomenon can be observed with regard to the national income level. The contractionary effect of a high tax burden results in low per capita income and a high prevalence of informal economic activities. The policy recommendations that can be made in line with the findings are as follows: (i) the design of tax policies should prioritise the determination of the optimal tax burden, the avoidance of the existing burden on a particular group and the spread of taxation across the tax base. The results indicate that this issue is necessary for economic efficiency as well as tax justice. (ii) It is important that the tax incentive system is designed in such a way that it does not distort the distribution of the tax burden, but encourages entrepreneurship and the registration of small enterprises. (iii) Increasing the efficiency of the bureaucratic process rather than increasing regulations as a whole will reduce the attractiveness of informality (iv) By ensuring the adaptation of tax audits to digital transformation, the effect of new technologies that facilitate the registration of economic activities should be highlighted rather than increasing informality for decision-makers. In this way, by ensuring the voluntary compliance of taxpayers based on tax fairness and creating competitive markets for producers, welfare gains can be achieved for all groups in society.