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Simulating the Relationship Between the Hidden Economy and the Tax Level and Tax Mix in New Zealand

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Abstract

In this paper we consider a simple Logistic relationship between the relative size of the Hidden Economy in New Zealand, and the effective tax rates for the major tax components. The model that we estimate from annual time-series data is used to simulate the effects of changes in both the overall tax "burden", and in the tax "mix", on the size of the Hidden Economy as a percentage of measured GDP in that country. At recent taxation levels, we find that for every percentage point reduction in the tax/GDP ratio, the Hidden Economy/GDP ratio drops by about 0.2 percentage points. We also find that the latter ratio is very responsive to changes in the tax "mix" in favour of relatively more indirect taxation; and that at an effective tax rate of about 21% of GDP, the impact of tax changes on underground activity begins to decelerate. The latter results suggests a tax evasion-efficient frontier for the tax/GDP ratio in New Zealand.

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Bibliographic Info

Paper provided by Department of Economics, University of Victoria in its series Econometrics Working Papers with number 9804.

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Length: 31 pages
Date of creation: 11 Jun 1998
Date of revision:
Handle: RePEc:vic:vicewp:9804

Note: ISSN 1485-6441. This is a revised version of N.Z. Inland Revenue Department Working Paper No. 22, December 1996.
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Keywords: Hidden Economy; Underground Economy; Tax Evasion; Tax Gap;

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Cited by:
  1. Giles, David E..A. & Tedds, Lindsay M. & Werkneh, Gugsa, 2002. "The Canadian Underground and Measured Economies: Granger Causality Results," MPRA Paper 39786, University Library of Munich, Germany.
  2. David E. A. Giles & Gugsa T. Werkneh & Betty J. Johnson, 1999. "Asymmetric Responses of the Underground Economy to Tax Changes: Evidence From New Zealand Data," Econometrics Working Papers 9911, Department of Economics, University of Victoria.
  3. David E. A. Giles, & Patrick J. Caragata, 1999. "The Learning Path of the Hidden Economy: The Tax Burden and Tax Evasion in New Zealand," Econometrics Working Papers 9904, Department of Economics, University of Victoria.
  4. Ratbek Dzhumashev & Emin Gahramanov, 2009. "A Stochastic Growth Model with Income Tax Evasion: Implications for Australia," Economics Series 2009_05, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  5. David E. A. Giles, 1998. "The Underground Economy: Minimizing the Size of Government," Econometrics Working Papers 9808, Department of Economics, University of Victoria.
  6. Lindsay M. Tedds & David E. A. Giles, 2000. "Modelling the Underground Economies in Canada and New Zealand: A Comparative Analysis," Econometrics Working Papers 0003, Department of Economics, University of Victoria.
  7. Maurizio Bovi, 2007. "National accounts, fiscal rules and fiscal policy. Mind the hidden gaps," ISAE Working Papers 76, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
  8. Johannah Branson & C. Lovell, 2001. "A Growth Maximising Tax Structure for New Zealand," International Tax and Public Finance, Springer, vol. 8(2), pages 129-146, March.
  9. Robert Draeseke & David E. A. Giles, 1999. "A Fuzzy Logic Approach to Modelling the Underground Economy," Econometrics Working Papers 9909, Department of Economics, University of Victoria.
  10. David E. A. Giles & Betty J. Johnson, 2000. "Taxes, Risk-Aversion, and the Size of the Underground Economy: A Nonparametric Analysis With New Zealand Data," Econometrics Working Papers 0006, Department of Economics, University of Victoria.

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