Taxing the unobservable: The impact of the shadow economy on inflation and taxation
AbstractWe test the notion that a government may rely less on taxes and more on inflation to finance its expenditures the larger the size of the shadow economy. In a sample of developed and developing countries over the 1999-2007 period, we indeed report a negative relation between the tax burden and the size of the shadow economy, and a positive relation between inflation and the size of the shadow economy. We provide evidence that both are conditional on central bank independence and the exchange rate regime. Both survive a series of robustness checks, controlling for reverse causality, simultaneity, level of development, and estimates of the shadow economy.
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Bibliographic InfoPaper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 12-023.
Length: 35 p.
Date of creation: Aug 2012
Date of revision:
Publication status: Published by:
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Shadow economy; Inflation; Taxes; Inflation tax;
Find related papers by JEL classification:
- O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
- H27 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other Sources of Revenue
This paper has been announced in the following NEP Reports:
- NEP-ACC-2012-09-03 (Accounting & Auditing)
- NEP-ALL-2012-09-03 (All new papers)
- NEP-IUE-2012-09-03 (Informal & Underground Economics)
- NEP-PBE-2012-09-03 (Public Economics)
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- Kodila-Tedika, Oasis & Mutascu, Mihai, 2013. "Shadow economy and tax revenue in Africa," MPRA Paper 50812, University Library of Munich, Germany.
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