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Exploring the Dark Side of Tax Policy: An Analysis of the Interactions between Fiscal Illusion and the Shadow Economy

Listed author(s):
  • Andreas Buehn
  • Roberto Dell' Anno
  • Friedrich Schneider

This paper presents an empirical analysis of the relationship between fiscal illusion and the shadow economy for 104 countries over the period 1989–2009. We argue that both unobservable phenomena are closely linked to each other, as the creation of a fiscal illusion may be helpful if governments want to control shadow economic activities. Using a MIMIC model with two latent variables we confirm previous findings on the driving forces of the shadow economy and identify the main determinants and indicators of fiscal illusion. Most importantly, we find that fiscal illusion negatively affects the shadow economy and the shadow economy positively affects fiscal illusion. Concealing the real tax burden we find that an increase of taxation increases both shadow economic activities and fiscal illusion.

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File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp5466.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 5466.

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Date of creation: 2015
Handle: RePEc:ces:ceswps:_5466
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  1. Rupert Sausgruber & Jean-Robert Tyran, 2005. "Testing the Mill hypothesis of fiscal illusion," Public Choice, Springer, vol. 122(1), pages 39-68, January.
  2. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-1177, September.
  3. Raj Chetty, 2009. "The Simple Economics of Salience and Taxation," NBER Working Papers 15246, National Bureau of Economic Research, Inc.
  4. James Anderson & David Gerbing, 1984. "The effect of sampling error on convergence, improper solutions, and goodness-of-fit indices for maximum likelihood confirmatory factor analysis," Psychometrika, Springer;The Psychometric Society, vol. 49(2), pages 155-173, June.
  5. Chong, Alberto & Gradstein, Mark, 2007. "Inequality and informality," Journal of Public Economics, Elsevier, vol. 91(1-2), pages 159-179, February.
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