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Do Increased Tax Base and Reductions in the Underground Economy Compensate for Lost Tax Revenue Following a Tax Reduction Policy? Evidence from Italy 1982 to 2006

Author

Listed:
  • Renzo Orsi

    (Department of Economics, University of Bologna, 40126 Bologna, Italy)

  • Knut Lehre Seip

    (Department of Technology, Arts and Design, Oslo Metropolitan University, P.O. Box 4, St. Olavs Plass, Pilestredet Park 33, 0176 Oslo, Norway)

Abstract

We here examine the frequent claim that an increase in the tax base and a decrease in tax evasion will compensate for a loss in tax revenues caused by a lower tax level. Using a unique data set for the estimated underground economy in Italy from 1982 to 2006, we found that a loss in tax revenues equivalent to 1% of the GDP would be partly compensated by an increase in GDP of 0.55%. The compensation would come from 0.31% of the GDP increase and from 0.24% of the reductions in the underground economy. These results apply to an economy with a high tax level (>32%) and a high underground economy (≥25%). Applying a high-resolution lead–lag method to the data, we ensured that tax changes were leading the GDP and, thus, a potential cause for changes in the GDP.

Suggested Citation

  • Renzo Orsi & Knut Lehre Seip, 2023. "Do Increased Tax Base and Reductions in the Underground Economy Compensate for Lost Tax Revenue Following a Tax Reduction Policy? Evidence from Italy 1982 to 2006," Economies, MDPI, vol. 11(7), pages 1-19, June.
    • Handle: RePEc:gam:jecomi:v:11:y:2023:i:7:p:177-:d:1180631
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    References listed on IDEAS

    as
    1. Hayo, Bernd & Mierzwa, Sascha, 2022. "Legislative tax announcements and GDP: Evidence from the United States, Germany, and the United Kingdom," Economics Letters, Elsevier, vol. 216(C).
    2. Acocella, Nicola & Beqiraj, Elton & Di Bartolomeo, Giovanni & Di Pietro, Marco & Felici, Francesco, 2020. "An evaluation of alternative fiscal adjustment plans: The case of Italy," Journal of Policy Modeling, Elsevier, vol. 42(3), pages 699-711.
    3. Gaetano Lisi & Maurizio Pugno, 2015. "A matching model of endogenous growth and underground firms," International Journal of Economic Theory, The International Society for Economic Theory, vol. 11(4), pages 347-369, December.
    4. Acocella, Nicola & Beqiraj, Elton & Di Bartolomeo, Giovanni & Di Pietro, Marco & Felici, Francesco, 2019. "An evaluation of alternative fiscal adjustment plans," EconStor Preprints 209707, ZBW - Leibniz Information Centre for Economics.
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