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Modelling the Hidden Economy and the Tax-Gap in New Zealand

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Abstract

This paper develops and estimates a structural, latent variable, model for the hidden economy in New Zealand, and a separate currency-demand model. The estimated latent variable model is used to generate an historical time-series index of hidden economic activity, which is calibrated via the information from the currency-demand model. Special attention is paid to data non-stationarity, and diagnostic testing. The size of the hidden economy is found to vary between 6.8% and 11.3% of measured GDP. This, in turn, implies that the total tax-gap is of the order of 6.4% to 10.2% of total tax liability in that country, though of course not all of this foregone revenue would be recoverable.

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Bibliographic Info

Paper provided by Department of Economics, University of Victoria in its series Econometrics Working Papers with number 9905.

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Length: 26 pages
Date of creation: 20 Feb 1999
Date of revision:
Publication status: Forthcoming in "Empirical Economics", 1999.
Handle: RePEc:vic:vicewp:9905

Note: ISSN 1485-6441. Earlier versions of this paper was released as University of Victoria Department of Economics Discussion Paper 97-8, April 1997, and UVic EWP9807, EWP9810.
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Keywords: Hidden Economy; Underground Economy; Tax Avoidance; Tax Evasion; Tax-Gap;

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