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Tax Reform in Georgia and the Size of the Shadow Economy

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This paper applies three different methods widely used in the literature to track changes in shadow economic activity in Georgia following a drastic tax reform in 2005. The first method is a currency demand approach based on macro level data. The second and third methods rely on micro data from household surveys. Overall, we find evidence that the amount of income underreporting decreased in the years following the reform. The biggest change is observed for households headed by a farmer, followed by “other” types of households where the head does not report any working status. Employed and self-employed households appear very similar before the tax reform and show minimal adjustment in income reporting in the post-reform period. Results, however, suggest that much of any difference may have come from increased enforcement efforts rather than rate changes.

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Paper provided by Hunter College Department of Economics in its series Economics Working Paper Archive at Hunter College with number 439.

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Date of creation: 2012
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Handle: RePEc:htr:hcecon:439

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Keywords: hidden/shadow economy; tax reform; consumer behavior; transition economy;

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  1. Kolm, Ann-Sofie & Nielsen, Søren Bo, 2007. "Under-reporting of income and Labour Market Performance," Working Papers 10-2007, Copenhagen Business School, Department of Economics.
  2. David E. A. Giles & Betty J. Johnson, 1999. "Taxes, Risk-Aversion, and the Size of the Underground Economy: A Nonparametric Analysis With New Zealand Data," Econometrics Working Papers 9910, Department of Economics, University of Victoria.
  3. Edgar L. Feige, 2004. "How Big IS the Irregular Economy?," Macroeconomics 0404005, EconWPA.
  4. Lindsay M. Tedds, 2004. "Nonparametric expenditure-based estimation of income under-reporting and the underground economy," Department of Economics Working Papers 2004-17, McMaster University.
  5. Panayiota Lyssiotou & Panos Pashardes & Thanasis Stengos, 2004. "Estimates of the black economy based on consumer demand approaches," Economic Journal, Royal Economic Society, vol. 114(497), pages 622-640, 07.
  6. Cebula, Richard, 1996. "An Empirical Analysis of the Impact of Government Tax and Auditing Policies on the Size of the Underground Economy: The Case of the United States, 1973-94," MPRA Paper 49810, University Library of Munich, Germany.
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