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The Underground Economy: Minimizing the Size of Government

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Abstract

In this paper we outline the results of some extensive econometric modelling that has been undertaken to establish a time-series of the size of the New Zealand Hidden Economy from 1968 to 1994. The derivation of these data has facilitated a good deal of associated research, and here we draw on those findings to comment, in particular, on the relationship between taxation policy and the effects taxes - in terms of both the overall tax burden and also the nature of the "tax mix", as between direct and indirect taxes, etc.. Our research in this area has revealed a clear and statistically significant link between high taxes and the size of the underground economy. Moreover, we have been able to establish the extent to which reductions in the tax burden, and changes to its "mix", can lower illicit activity in the economy. Interestingly, and very importantly, this in turn enables us to establish an "optimal" aggregate tax rate, if the objective is maximize the impact on the Hidden Economy. Many of the broad lessons that emerge from this research have applicability in the Canadian context, and more specific work of this type with Canadian data is currently being undertaken by the author and colleagues.

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Bibliographic Info

Paper provided by Department of Economics, University of Victoria in its series Econometrics Working Papers with number 9801.

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Length: 18 pages
Date of creation: 31 Mar 1998
Date of revision:
Publication status: Published in H. Grubel (ed.), "How to Spend the Fiscal Dividend: What is the Optimal Size of Government?" (Fraser Institute, Vancouver, B.C., 1998).
Handle: RePEc:vic:vicewp:9801

Note: ISSN 1485-6441. This is a revised version of a presentation to the Fraser Institute Conference on "How to Spend the Fiscal Dividend", Ottawa, Ontario, December 1997
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Keywords: Hidden Economy; Underground Economy; Tax Evasion; Tax Gap;

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References

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  1. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Books, National Bureau of Economic Research, Inc, number caga58-1, octubre-d.
  2. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Chapters, in: The Demand for Currency Relative to Total Money Supply, pages 1-37 National Bureau of Economic Research, Inc.
  3. Frey, Bruno S & Pommerehne, Werner W, 1984. "The Hidden Economy: State and Prospects for Measurement," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 30(1), pages 1-23, March.
  4. 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.
  5. David Giles, 1997. "The hidden economy and tax-evasion prosecutions in New Zealand," Applied Economics Letters, Taylor & Francis Journals, vol. 4(5), pages 281-285.
  6. Edgar L. Feige, 2004. "How Big IS the Irregular Economy?," Macroeconomics 0404005, EconWPA.
  7. 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.
  8. 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.
  9. David E. A. Giles, 1998. "The Hidden Economy and the Tax-Gap in New Zealand: A Latent Variable Analysis," Econometrics Working Papers 9807, Department of Economics, University of Victoria.
  10. Zellner, Arnold, 1970. "Estimation of Regression Relationships Containing Unobservable Independent Variables," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(3), pages 441-54, October.
  11. 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.
  12. David Giles, 1999. "The rise and fall of the New Zealand underground economy: are the responses symmetric?," Applied Economics Letters, Taylor & Francis Journals, vol. 6(3), pages 185-189.
  13. Phillip Cagan, 1958. "The Demand for Currency Relative to the Total Money Supply," Journal of Political Economy, University of Chicago Press, vol. 66, pages 303.
  14. 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.
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Cited by:
  1. repec:wii:bpaper:bowp:050 is not listed on IDEAS
  2. Andreas Buehn & Friedrich Schneider, 2012. "Corruption and the shadow economy: like oil and vinegar, like water and fire?," International Tax and Public Finance, Springer, vol. 19(1), pages 172-194, February.
  3. Bame-Aldred, Charles W. & Cullen, John B. & Martin, Kelly D. & Parboteeah, K. Praveen, 2013. "National culture and firm-level tax evasion," Journal of Business Research, Elsevier, vol. 66(3), pages 390-396.
  4. Buehn, Andreas & Schneider, Friedrich, 2009. "Corruption and the Shadow Economy: A Structural Equation Model Approach," IZA Discussion Papers 4182, Institute for the Study of Labor (IZA).
  5. Roberto Dell’Anno & Miguel Gómez-Antonio & Angel Pardo, 2007. "The shadow economy in three Mediterranean countries: France, Spain and Greece. A MIMIC approach," Empirical Economics, Springer, vol. 33(1), pages 51-84, July.

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