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Modelling the Underground Economies in Canada and New Zealand: A Comparative Analysis

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  • Lindsay M. Tedds
  • David E. A. Giles

    ()

Abstract

Recently there has been a resurgence of interest internationally in measuring the size of the underground economies. This has led to new approaches to this problem, and a more rigorous treatment of the associated time-series issues. In this paper we compare our recent underground economy results for Canada and New Zealand. These results provide time-series measures of the (legally-based plus illegally-based) underground economies in those countries, over similar historical periods, obtained via the same methodology. This methodology involves the estimation of structural MIMIC models, calibrated by estimating nonlinear currency-demand models. In addition to providing the underground economy measures themselves, we also compare the medium-term trends and cyclical characteristics of underground output in these two countries, and their responsiveness to changes in taxation policies. Special attention is paid to the effects on the New Zealand and Canadian underground economies of the Goods and Services Taxes in 1986 and 1991 respectively. These taxes are virtually identical in their design, but the context of their implementation led to quite different impacts on the associated underground economies.

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Bibliographic Info

Paper provided by Department of Economics, University of Victoria in its series Econometrics Working Papers with number 0003.

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Length: 16 pages
Date of creation: 14 Apr 2000
Date of revision:
Handle: RePEc:vic:vicewp:0003

Note: ISSN 1485-6441
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Keywords: underground economy; tax evasion; MIMIC models; goods and services tax;

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References

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  1. Kesselman, Jonathan R., 1989. "Income tax evasion : An intersectoral analysis," Journal of Public Economics, Elsevier, vol. 38(2), pages 137-182, March.
  2. Rolf Mirus & Roger S. Smith, 1981. "Canada's Irregular Economy," Canadian Public Policy, University of Toronto Press, vol. 7(3), pages 444-453, Summer.
  3. David E. A. Giles, & Patrick J. Caragata, 1998. "The Learning Path of the Hidden Economy:Tax and Growth Effects in New Zealand," Econometrics Working Papers 9805, Department of Economics, University of Victoria.
  4. David E. A. Giles, 1999. "Modelling the hidden economy and the tax-gap in New Zealand," Empirical Economics, Springer, vol. 24(4), pages 621-640.
  5. Jung, Young H. & Snow, Arthur & Trandel, Gregory A., 1994. "Tax evasion and the size of the underground economy," Journal of Public Economics, Elsevier, vol. 54(3), pages 391-402, July.
  6. David Giles, 1997. "Causality between the measured and underground economies in New Zealand," Applied Economics Letters, Taylor & Francis Journals, vol. 4(1), pages 63-67.
  7. David E. A. Giles & Lindsay Tedds & Gugsa Werkneh, 1999. "The Canadian Underground and Measured Economies: Granger Causality Results," Econometrics Working Papers 9907, Department of Economics, University of Victoria.
  8. Giles, David E A, 1997. "Testing for Asymmetry in the Measured and Underground Business Cycles in New Zealand," The Economic Record, The Economic Society of Australia, vol. 73(222), pages 225-32, September.
  9. Frey, Bruno S. & Weck-Hanneman, Hannelore, 1984. "The hidden economy as an 'unobserved' variable," European Economic Review, Elsevier, vol. 26(1-2), pages 33-53.
  10. Giles, David E A, 1999. "Measuring the Hidden Economy: Implications for Econometric Modelling," Economic Journal, Royal Economic Society, vol. 109(456), pages F370-80, June.
  11. Trandel, Greg & Snow, Arthur, 1999. "Progressive income taxation and the underground economy," Economics Letters, Elsevier, vol. 62(2), pages 217-222, February.
  12. Rolf Mirus & Roger S. Smith & Vladimir Karoleff, 1994. "Canada's Underground Economy Revisited: Update and Critique," Canadian Public Policy, University of Toronto Press, vol. 20(3), pages 235-252, September.
  13. David E. A. Giles & Betty J. Johnson, 1999. "Taxes, Risk-Aversion, and the Size of the Underground Economy: A Nonparametric Analysis With New Zealand Data," Econometrics Working Papers 9910, Department of Economics, University of Victoria.
  14. 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.
  15. Goldberger, Arthur S, 1972. "Structural Equation Methods in the Social Sciences," Econometrica, Econometric Society, vol. 40(6), pages 979-1001, November.
  16. Patrick J. Caragata, & David E. A. Giles, 1998. "Simulating the Relationship Between the Hidden Economy and the Tax Level and Tax Mix in New Zealand," Econometrics Working Papers 9804, Department of Economics, University of Victoria.
  17. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
  18. Watson, Harry, 1985. "Tax evasion and labor markets," Journal of Public Economics, Elsevier, vol. 27(2), pages 231-246, July.
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Cited by:
  1. Corina - Maria Ene & Andrei Stefanescu, 2011. "Size And Implication Of Underground Economy In Romania - A Mimic Approach," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(13), pages 8.
  2. repec:idb:brikps:21978 is not listed on IDEAS
  3. Nikopour, Hesam, 2003. "Measuring the size of underground economy in Iran with emphasis on the incentives for evasion of insurance premium payment (1961 – 2001)," MPRA Paper 13176, University Library of Munich, Germany, revised 05 Feb 2009.

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