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Modelling the hidden economy and the tax-gap in New Zealand

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Author Info
David E. A. Giles () (Department of Economics, University of Victoria, P.O. Box 1700, STN CSC, Victoria, B.C., Canada, V8W 2Y2)

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Abstract

This paper develops and estimates a structural, latent variable, model for the hidden economy in New Zealand, and a separate currency-demand model. The estimated latent variable model is used to generate an historical time-series index of hidden economic activity, which is calibrated via the information from the currency-demand model. Special attention is paid to data non-stationarity, and to diagnostic testing. Over the period 1968 to 1994, the size of the hidden economy is found to vary between 6.8% and 11.3% of measured GDP. This, in turn, implies that the total tax-gap is of the order of 6.4% to 10.2% of total tax liability in that country. Of course, not all of this foregone revenue would be recoverable, as not all of the activity in the underground economy is responsive to changes in taxation or other policies.

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Publisher Info
Article provided by Springer in its journal Empirical Economics.

Volume (Year): 24 (1999)
Issue (Month): 4 ()
Pages: 621-640
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Handle: RePEc:spr:empeco:v:24:y:1999:i:4:p:621-640

Note: received: August 1997/Final version received: March 1999
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Related research
Keywords: Underground economy; latent variables; tax avoidance; tax evasion; tax-gap;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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