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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)

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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Bibliographic Info

Paper provided by ISTAT - Italian National Institute of Statistics - (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
Date of revision:
Handle: RePEc:isa:wpaper:93

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

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