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An Analysis of the Conflict Between Underground Economy and Tax Evasion / Der Konflikt zwischen Schattenwirtschaft und Steuerhinterziehung

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  • Soldatos Gerasimos

    (Ph.D., Department of Economics, University of Macedonia, Egnatias 156, G-54621 Thessaloniki, Greece)

Abstract

This paper investigates the relationship between the underground economy and tax evasion through a microeconomic model based on portfolio theory. The underground economy is assumed to be the result of bureaucracy, excessive regulation, and tax evasion. The main conclusion of the analysis is that there may exist “only tax evasion” or “only underground economy”. These two extreme cases pinpoint to a conflict, to a trade-off, between these two phenomena. That is, tax evasion and the incentive to “go underground” are found to be inversely related. Progressive income and wealth taxation, improved tax administration, and policy measures that enhance the return on investment in the official economy, emerge as some of the policy instruments that could be used against both the underground economy and tax evasion.

Suggested Citation

  • Soldatos Gerasimos, 1994. "An Analysis of the Conflict Between Underground Economy and Tax Evasion / Der Konflikt zwischen Schattenwirtschaft und Steuerhinterziehung," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 213(3), pages 292-304, June.
    • Handle: RePEc:jns:jbstat:v:213:y:1994:i:3:p:292-304
    DOI: 10.1515/jbnst-1994-0304
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