Does Information and Communication Technology Influence the Shadow Economy? A Panel Data Analysis for EU Countries

Information and communication technology (ICT) adoption has emerged as a driving force in reshaping tax systems and global economic practices. This study addresses the implications of digitalization in reducing tax avoidance in the European Union (EU) Member States, where the time frame of analysis spans over a 10-year period between 2013 and 2022. This research aims to highlight correlations between tax avoidance and digitization. The means used for this cross-sectional and temporal dataset are based on the application of a regression on panel data, where we used the dependent variable tax avoidance represented by the shadow economy and the proxy for ICT services as independent variable. The study extends the literature by analyzing the influence of ICT on the shadow economy in the European Union and the contribution brings the innovative use of Internet server security and Internet access as factors influencing the shadow economy for this sample, through the System GMM method. We emphasize the results by replacing the shadow economy estimated using the classic MIMIC method with that estimated using the abnormal energy consumption method for robustness checks. The results confirm that increasing digitalization in EU countries leads to a reduction of the shadow economy, where the worst performing economies are in the South-East of the European Union. Finally, this study provides recommendations for increasing investments in the ICT services sphere and for developing effective tax policies to increase tax transparency.