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Fiscal illusion and the shadow economy: Two sides of the same coin?

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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. Most importantly, we find that fiscal illusion negatively affects the shadow economy: Concealing the real tax burden through fiscal illusion potentially contributes to the government’s efforts to repress shadow economic activities.

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File URL: http://www.econ.jku.at/papers/2013/wp1321.pdf
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Bibliographic Info

Paper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2013-21.

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Length: 29 pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:jku:econwp:2013_21

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Keywords: Fiscal illusion; shadow economy; MIMIC model; latent variables; tax burden; tax complexity;

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  1. Andreas Buehn & Friedrich Schneider, 2012. "Shadow economies around the world: novel insights, accepted knowledge, and new estimates," International Tax and Public Finance, Springer, vol. 19(1), pages 139-171, February.
  2. Chong, Alberto & Gradstein, Mark, 2006. "Inequality and Informality," CEPR Discussion Papers 5545, C.E.P.R. Discussion Papers.
  3. Friedrich Schneider, 2004. "Shadow Economies around the World: What do we really know?," IAW Discussion Papers 16, Institut für Angewandte Wirtschaftsforschung (IAW).
  4. Dollery, Brian E & Worthington, Andrew C, 1996. " The Empirical Analysis of Fiscal Illusion," Journal of Economic Surveys, Wiley Blackwell, vol. 10(3), pages 261-97, September.
  5. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-90, March.
  6. Friedrich Schneider & Dominik Enste, 2000. "Shadow Economies Around the World," IMF Working Papers 00/26, International Monetary Fund.
  7. Roberto Dell'Anno, 2008. "What is the relationship between Unofficial and Official Economy? An analysis in Latin American Countries," Quaderni DSEMS 23-2008, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.
  8. Richard Wagner, 1976. "Revenue structure, fiscal illusion, and budgetary choice," Public Choice, Springer, vol. 25(1), pages 45-61, March.
  9. Roberto Dell’Anno & Paulo Mourao, 2012. "Fiscal Illusion around the World," Public Finance Review, , vol. 40(2), pages 270-299, March.
  10. Anne Boomsma, 1985. "Nonconvergence, improper solutions, and starting values in lisrel maximum likelihood estimation," Psychometrika, Springer, vol. 50(2), pages 229-242, June.
  11. 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.
  12. Tanzi, Vito, 1999. "Uses and Abuses of Estimates of the Underground Economy," Economic Journal, Royal Economic Society, vol. 109(456), pages F338-47, June.
  13. James Anderson & David Gerbing, 1984. "The effect of sampling error on convergence, improper solutions, and goodness-of-fit indices for maximum likelihood confirmatory factor analysis," Psychometrika, Springer, vol. 49(2), pages 155-173, June.
  14. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
  15. 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, pages 109-149, 05.
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