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Taxes, Risk-Aversion, and the Size of the Underground Economy: A Nonparametric Analysis With New Zealand Data

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  • David E. A. Giles

    ()

  • Betty J. Johnson

    ()

Abstract

We use nonparametric regression analysis to investigate the relationship between the effective tax rate and the relative size of the underground economy, using New Zealand data. The theoretical underpinnings of such a relationship are established by extending some of the predictions of the recent model of Trandel and Snow (1999) to allow for the form of the available aggregate data. Time-series evidence indicates that these data are non-stationary and cointegrated, and this is taken into account in our estimation. The theoretical framework produces an ambiguous prediction regarding the sign of the relationship we are studying. However, our nonparametric empirical analysis produces a positive and "S-shaped" relationship, and this supports earlier empirical studies that imposed such functional forms. The estimated model is used to simulate the effects of hypothetical tax changes on the size of the New Zealand underground economy, and to draw policy conclusions.

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Bibliographic Info

Paper provided by Department of Economics, University of Victoria in its series Econometrics Working Papers with number 9910.

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Length: 23 pages
Date of creation: 11 Aug 1999
Date of revision:
Handle: RePEc:vic:vicewp:9910

Note: ISSN 1485-6441
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Keywords: Tax evasion; underground economy; risk aversion; tax rates; nonparametric regression.;

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References

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  1. David E. A. Giles, 1998. "Modelling the Tax Compliance Profiles of New Zealand Firms: Evidence from Audit Records," Econometrics Working Papers, Department of Economics, University of Victoria 9803, Department of Economics, University of Victoria.
  2. 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, Department of Economics, University of Victoria 9804, Department of Economics, University of Victoria.
  3. Hardle, W., 1992. "Applied Nonparametric Methods," Papers, Catholique de Louvain - Institut de statistique 9204, Catholique de Louvain - Institut de statistique.
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  6. Oliver LINTON, . "Applied nonparametric methods," Statistic und Oekonometrie 9312, Humboldt Universitaet Berlin.
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  8. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, Elsevier, vol. 1(3-4), pages 323-338, November.
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  29. 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, Department of Economics, University of Victoria 9911, Department of Economics, University of Victoria.
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Citations

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Cited by:
  1. Torosyan, Karine & Filer, Randall K., 2012. "Tax Reform in Georgia and the Size of the Shadow Economy," IZA Discussion Papers 6912, Institute for the Study of Labor (IZA).
  2. Lindsay M. Tedds & David E. A. Giles, 2000. "Modelling the Underground Economies in Canada and New Zealand: A Comparative Analysis," Econometrics Working Papers, Department of Economics, University of Victoria 0003, Department of Economics, University of Victoria.
  3. 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, Department of Economics, University of Victoria 9911, Department of Economics, University of Victoria.
  4. Trinh Le, 2007. "Does New Zealand have a household saving crisis?," Macroeconomics Working Papers 23081, East Asian Bureau of Economic Research.

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