Exploring the Dark Side of Tax Policy: An Analysis of the Interactions between Fiscal Illusion and the Shadow Economy
This paper presents an empirical analysis of the relationship between fiscal illusion and the shadow economy for 104 countries over the period 1989â€“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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- Rupert Sausgruber & Jean-Robert Tyran, 2005.
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- Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and taxation: theory and evidence," Finance and Economics Discussion Series 2009-11, Board of Governors of the Federal Reserve System (U.S.).
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