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The learning path of the hidden economy: the tax burden and tax evasion in New Zealand

  • David Giles
  • Patrick Caragata

This paper considers the 'learning curve' relationship between the aggregate tax rate and the relative size of the hidden economy in New Zealand. Some simple non-linear models are estimated so that the effects of changes in the effective tax rate on the underground economy can be simulated. This study finds that about half of the hidden activity in New Zealand is a learned response to changing opportunities and constraints in fiscal policy, but this amount varies over the business cycle. Simulating a zero tax rate permits us to discover the 'natural rate' of underground and criminal activity. Some partial lessons are drawn for taxation policy in that country.

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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 33 (2001)
Issue (Month): 14 ()
Pages: 1857-1867

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Handle: RePEc:taf:applec:v:33:y:2001:i:14:p:1857-1867
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  1. 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.
  2. Kesselman, Jonathan R., 1989. "Income tax evasion : An intersectoral analysis," Journal of Public Economics, Elsevier, vol. 38(2), pages 137-182, March.
  3. Xavier Sala-i-Martin, 1997. "I just ran four million regressions," Economics Working Papers 201, Department of Economics and Business, Universitat Pompeu Fabra.
  4. David E. A. Giles, 1999. "Modelling the Hidden Economy and the Tax-Gap in New Zealand," Econometrics Working Papers 9905, Department of Economics, University of Victoria.
  5. Lemieux, Thomas & Fortin, Bernard & Frechette, Pierre, 1994. "The Effect of Taxes on Labor Supply in the Underground Economy," American Economic Review, American Economic Association, vol. 84(1), pages 231-54, March.
  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. Martin Feldstein, 1996. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Working Papers 5469, National Bureau of Economic Research, Inc.
  8. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  9. 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.
  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. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  12. White, Kenneth J, 1992. "The Durbin-Watson Test for Autocorrelation in Nonlinear Models," The Review of Economics and Statistics, MIT Press, vol. 74(2), pages 370-73, May.
  13. Levine, Ross & Renelt, David, 1991. "A sensitivity analysis of cross-country growth regressions," Policy Research Working Paper Series 609, The World Bank.
  14. Gerrard, W J & Godfrey, L G, 1998. "Diagnostic Checks for Single-Equation Error-Correction and Autoregressive Distributed Lag Models," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(2), pages 222-37, March.
  15. David Giles, 1997. "The hidden economy and tax-evasion prosecutions in New Zealand," Applied Economics Letters, Taylor & Francis Journals, vol. 4(5), pages 281-285.
  16. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
  17. Trandel, Greg & Snow, Arthur, 1999. "Progressive income taxation and the underground economy," Economics Letters, Elsevier, vol. 62(2), pages 217-222, February.
  18. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
  19. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  20. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
  21. Giles, David E A, 1997. "Testing for Asymmetry in the Measured and Underground Business Cycles in New Zealand," The Economic Record, The Economic Society of Australia, vol. 73(222), pages 225-32, September.
  22. William Easterly & Sergio Rebelo, 1993. "Fiscal Policy and Economic Growth: An Empirical Investigation," NBER Working Papers 4499, National Bureau of Economic Research, Inc.
  23. Slemrod, Joel B, 1985. "An Empirical Test for Tax Evasion," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 232-38, May.
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