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Treasury V Dodgers. A Tale of Fiscal Consolidation and Tax Evasion

Author

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  • Maurizio Bovi

    (ISAE - Institute for Studies and Economic Analyses)

  • Peter Claeys

    (Universitat de Barcelona - Facultat de Ciències Econòmiques i Empresarials)

Abstract

The government influences the equilibrium size of hidden activity. Higher taxes give an incentive to evade. The provision of public services, social transfers and public employment may have offsetting effects on the underground economy. The budget constraint makes the relation between the shadow economy, taxes and spending inherently dynamic. A lack of time series data has prohibited the analyisis of these feedback effects. We take advantage of a unique dataset on the Italian underground economy. We find that over the period 1980-2004 the underground economy reacts to changes in government spending as well as to variations in the tax burden.

Suggested Citation

  • Maurizio Bovi & Peter Claeys, 2008. "Treasury V Dodgers. A Tale of Fiscal Consolidation and Tax Evasion," ISAE Working Papers 93 Classification-JEL E62, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
    • Handle: RePEc:isa:wpaper:93
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    Cited by:

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    2. Soldatos, Gerasimos T., 2015. "An Anti-Austerity Policy Recipe against Debt Accumulation in the Presence of Hidden Economy," MPRA Paper 69911, University Library of Munich, Germany.

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    Keywords

    fiscal policy; policy rules; taxes; debt; shadow economy; Italy.;
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