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Exploring the Dark Side of Tax Policy: An Analysis of the Interactions between Fiscal Illusion and the Shadow Economy

Author

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  • Andreas Buehn
  • Roberto Dell' Anno
  • Friedrich Schneider

Abstract

This paper presents an empirical analysis of the relationship between fiscal illusion and the shadow economy for 104 countries over the period 1989–2009. We argue that both unobservable phenomena are closely linked to each other, as the creation of a fiscal illusion may be helpful if governments want to control shadow economic activities. Using a MIMIC model with two latent variables we confirm previous findings on the driving forces of the shadow economy and identify the main determinants and indicators of fiscal illusion. Most importantly, we find that fiscal illusion negatively affects the shadow economy and the shadow economy positively affects fiscal illusion. Concealing the real tax burden we find that an increase of taxation increases both shadow economic activities and fiscal illusion.

Suggested Citation

  • Andreas Buehn & Roberto Dell' Anno & Friedrich Schneider, 2015. "Exploring the Dark Side of Tax Policy: An Analysis of the Interactions between Fiscal Illusion and the Shadow Economy," CESifo Working Paper Series 5466, CESifo.
    • Handle: RePEc:ces:ceswps:_5466
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    References listed on IDEAS

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    1. Rupert Sausgruber & Jean-Robert Tyran, 2005. "Testing the Mill hypothesis of fiscal illusion," Public Choice, Springer, vol. 122(1), pages 39-68, January.
    2. Lars P. Feld & Friedrich Schneider, 2010. "Survey on the Shadow Economy and Undeclared Earnings in OECD Countries," German Economic Review, Verein für Socialpolitik, vol. 11(2), pages 109-149, May.
    3. Andreas Buehn & Friedrich Schneider, 2012. "Corruption and the shadow economy: like oil and vinegar, like water and fire?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(1), pages 172-194, February.
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    8. Lars P. Feld & Friedrich Schneider, 2010. "Survey on the Shadow Economy and Undeclared Earnings in OECD Countries," German Economic Review, Verein für Socialpolitik, vol. 11(2), pages 109-149, May.
    9. Raj Chetty, 2009. "The Simple Economics of Salience and Taxation," NBER Working Papers 15246, National Bureau of Economic Research, Inc.
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    12. Friedrich Schneider & Andreas Buehn & Claudio Montenegro, 2010. "New Estimates for the Shadow Economies all over the World," International Economic Journal, Taylor & Francis Journals, vol. 24(4), pages 443-461.
    13. Werner W. Pommerehne & Friedrich Schneider*, 1978. "Fiscal Illusion, Political Institutions, And Local Public Spending," Kyklos, Wiley Blackwell, vol. 31(3), pages 381-408, August.
    14. Tanzi, Vito, 1999. "Uses and Abuses of Estimates of the Underground Economy," Economic Journal, Royal Economic Society, vol. 109(456), pages 338-347, June.
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    16. Roberto Dell’Anno & Paulo Mourao, 2012. "Fiscal Illusion around the World," Public Finance Review, , vol. 40(2), pages 270-299, March.
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    18. Dollery, Brian E & Worthington, Andrew C, 1996. "The Empirical Analysis of Fiscal Illusion," Journal of Economic Surveys, Wiley Blackwell, vol. 10(3), pages 261-297, September.
    19. Roberto Dell’Anno & Brian Dollery, 2014. "Comparative fiscal illusion: a fiscal illusion index for the European Union," Empirical Economics, Springer, vol. 46(3), pages 937-960, May.
    20. Richard Wagner, 1976. "Revenue structure, fiscal illusion, and budgetary choice," Public Choice, Springer, vol. 25(1), pages 45-61, March.
    21. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-190, March.
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    Cited by:

    1. Aysel Amir & Korhan Gökmenoğlu, 2023. "Analyzing the Drivers of the Shadow Economy for the Case of the CESEE Region," Journal of Economics / Ekonomicky casopis, Institute of Economic Research, Slovak Academy of Sciences, vol. 71(2), pages 155-181, February.
    2. Mawejje Joseph & Odhiambo Nicholas M., 2020. "Fiscal Reforms and Deficits in Tanzania: An Exploratory Review," Studia Universitatis „Vasile Goldis” Arad – Economics Series, Sciendo, vol. 30(1), pages 57-75, March.
    3. Hotak, Nematullah & Kaneko, Shinji, 2022. "Fiscal illusion of the stated preferences of government officials regarding interministerial policy packages: A case study on child labor in Afghanistan," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 285-298.
    4. Roberto Dell’Anno, 2020. "Corruption around the world: an analysis by partial least squares—structural equation modeling," Public Choice, Springer, vol. 184(3), pages 327-350, September.

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    More about this item

    Keywords

    fiscal illusion; shadow economy; MIMIC model; latent variables; tax burden; tax complexity;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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