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Asymmetric Responses of the Underground Economy to Tax Changes: Evidence From New Zealand Data

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  • David E. A. Giles

    ()

  • Gugsa T. Werkneh

    ()

  • Betty J. Johnson

    ()

Abstract

We consider the relationship between taxes and the size of the underground economy in New Zealand. Previous studies indicate that a positive relationship exists in this and certain other countries. We address the following question: "Is the response of the underground economy to an increase in taxes the same as its response to a decrease in taxes?" To answer this question we modify an existing methodology for testing for both "timing symmetry" and "pattern symmetry". Paying careful attention to the non-stationarity and cointegration of our annual data, we test for the presence of such symmetry in the tax-evasion relationship for New Zealand. We find that although the effect on the underground economy of an upward movement in the effective tax rate is numerically greater than that of a downward tax movement, this difference is not statistically significant in either the short-run or the long-run. Elasticity and multiplier calculations allow us to quantify some of the effects of changes in taxation policy on hidden output.

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Bibliographic Info

Paper provided by Department of Economics, University of Victoria in its series Econometrics Working Papers with number 9911.

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Length: 21 pages
Date of creation: 11 Aug 1999
Date of revision:
Handle: RePEc:vic:vicewp:9911

Note: ISSN 1485-6441
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Keywords: Tax evasion; underground economy; tax rates; asymmetry;

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  1. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
  2. Clotfelter, Charles T, 1983. "Tax Evasion and Tax Rates: An Analysis of Individual Returns," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 363-73, August.
  3. Koskela, Erkki, 1983. "A note on progression, penalty schemes and tax evasion," Journal of Public Economics, Elsevier, vol. 22(1), pages 127-133, October.
  4. David E. A. Giles, 1998. "Modelling the Tax Compliance Profiles of New Zealand Firms: Evidence from Audit Records," Department Discussion Papers 9803, Department of Economics, University of Victoria.
  5. David E. A. Giles, 1998. "Modelling the Hidden Economy and the Tax-Gap in New Zealand," Econometrics Working Papers 9810, Department of Economics, University of Victoria.
  6. 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.
  7. 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.
  8. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  9. Severin Borenstein & A. Colin Cameron, 1992. "Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?," NBER Working Papers 4138, National Bureau of Economic Research, Inc.
  10. 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.
  11. Leybourne, S J & McCabe, B P M, 1994. "A Simple Test for Cointegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 56(1), pages 97-103, February.
  12. Crane, Steven E & Nourzad, Farrokh, 1987. "On the Treatment of Income Tax Rates in Empirical Analysis of Tax Evasion," Kyklos, Wiley Blackwell, vol. 40(3), pages 338-48.
  13. Bacon, Robert W., 1991. "Rockets and feathers: the asymmetric speed of adjustment of UK retail gasoline prices to cost changes," Energy Economics, Elsevier, vol. 13(3), pages 211-218, July.
  14. David Giles & Patrick Caragata, 2001. "The learning path of the hidden economy: the tax burden and tax evasion in New Zealand," Applied Economics, Taylor & Francis Journals, vol. 33(14), pages 1857-1867.
  15. Kesselman, Jonathan R., 1989. "Income tax evasion : An intersectoral analysis," Journal of Public Economics, Elsevier, vol. 38(2), pages 137-182, March.
  16. Pencavel, John H., 1979. "A note on income tax evasion, labor supply, and nonlinear tax schedules," Journal of Public Economics, Elsevier, vol. 12(1), pages 115-124, August.
  17. Dolado, Juan J & Jenkinson, Tim & Sosvilla-Rivero, Simon, 1990. " Cointegration and Unit Roots," Journal of Economic Surveys, Wiley Blackwell, vol. 4(3), pages 249-73.
  18. 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.
  19. Watson, Harry, 1985. "Tax evasion and labor markets," Journal of Public Economics, Elsevier, vol. 27(2), pages 231-246, July.
  20. Trandel, Greg & Snow, Arthur, 1999. "Progressive income taxation and the underground economy," Economics Letters, Elsevier, vol. 62(2), pages 217-222, February.
  21. Schneider, Friedrich, 1994. "Can the Shadow Economy Be Reduced through Major Tax Reforms? An Empirical Investigation for Austria," Public Finance = Finances publiques, , vol. 49(Supplemen), pages 137-52.
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Cited by:
  1. Anbarci, Nejat & Gomis-Porqueras, Pedro & Marcus, Pivato, 2012. "Formal and informal markets: A strategic and evolutionary perspective," MPRA Paper 42513, University Library of Munich, Germany.
  2. 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.
  3. Michele Bernasconi, Luca Corazzini, Raffaello Seri, 2012. "Tax Evasion: Does the Tax Burden Matter?," ISLA Working Papers 43, ISLA, Centre for research on Latin American Studies and Transition Economies, Universita' Bocconi, Milano, Italy.
  4. Wang, David Han-Min & Yu, Tiffany Hui-Kuang & Hu, Heng-Chang, 2012. "On the asymmetric relationship between the size of the underground economy and the change in effective tax rate in Taiwan," Economics Letters, Elsevier, vol. 117(1), pages 340-343.
  5. Bernasconi, Michele & Corazzini, Luca & Seri, Raffaello, 2014. "Reference dependent preferences, hedonic adaptation and tax evasion: Does the tax burden matter?," Journal of Economic Psychology, Elsevier, vol. 40(C), pages 103-118.
  6. repec:idb:brikps:21978 is not listed on IDEAS
  7. Nejat Anbarci & Pedro Gomis-Porqueras & Marcus Pivato, 2013. "Formal and Informal Markets: A Strategic and Dynamic Perspective," Economics Series 2013_6, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.

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