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

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Author Info
Maurizio Bovi (ISAE - Institute for Studies and Economic Analyses)
Peter Claeys (Universitat de Barcelona - Facultat de Ciències Econòmiques i Empresarials)

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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.

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Paper provided by ISAE - Institute for Studies and Economic Analyses - (Rome, ITALY) in its series ISAE Working Papers with number 93 Classification-JEL E62, E63, O17.

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Length: 40 pages
Date of creation: Feb 2008
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Handle: RePEc:isa:wpaper:93

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Related research
Keywords: fiscal policy; policy rules; taxes; debt; shadow economy; Italy.;

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  3. Tanzi, Vito, 1999. "Uses and Abuses of Estimates of the Underground Economy," Economic Journal, Royal Economic Society, vol. 109(456), pages F338-47, June. [Downloadable!] (restricted)
  4. Maurizio Bovi & Roberto Dell'Anno, 2007. "The Changing Nature of the OECD Shadow Economy," ISAE Working Papers 81, ISAE - Institute for Studies and Economic Analyses - (Rome, ITALY). [Downloadable!]
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  6. Laura Castellucci & Maurizio Bovi, 1999. "What Do We Know About The Size Of The Underground Economy In Italy Beyond The "Common Wisdom"? Some Empirically Tested Propositions," Departmental Working Papers 120, Tor Vergata University, CEIS. [Downloadable!]
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  10. David B. Gordon & Eric M. Leeper, 2005. "Are Countercyclical Fiscal Policies Counterproductive?," NBER Working Papers 11869, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  20. Friedrich Schneider & Dominik H. Enste, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March. [Downloadable!] (restricted)
  21. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November. [Downloadable!] (restricted)
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