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A Fresh Assessment of the Underground Economy and Tax Evasion in Pakistan : Causes, Consequences, and Linkages with the Formal Economy

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  • M. Ali Kemal

    (PIDE)

Abstract

Rise in the underground economy creates problems for the policy-makers to formulate economic policies, especially the monetary and fiscal policies. It is found that if there was no tax evasion, budgets balance might have been zero and positive for some years and we would not have needed to borrow as much as we had borrowed. It is concluded that the impact of the underground economy is significant to the movements of the formal economy, but the impact of formal economy is insignificant in explaining the movements in the underground economy. In the long run, underground economy and official economy are positively associated. It is estimated that the underground economy ranges between Rs 2.91 trillion and Rs 3.34 trillion (54.6 percent of GDP to 62.8 percent of GDP respectively) in 2005 and tax evasion ranges between Rs 302 billion and Rs 347 billion (5.7 percent of GDP to 6.5 percent of GDP respectively) in 2005. Underground economy and tax evasion were increasing very rapidly in the early 1980s but the rate of increase accelerated in the 1990s. It declined in 1999, but reverted to an increasing trend until 2003. It declined again in 2004 and 2005.

Suggested Citation

  • M. Ali Kemal, 2007. "A Fresh Assessment of the Underground Economy and Tax Evasion in Pakistan : Causes, Consequences, and Linkages with the Formal Economy," Microeconomics Working Papers 22200, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:microe:22200
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    References listed on IDEAS

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    Cited by:

    1. Salar, Laleena & Zaman, Khalid & Khilji, Bashir Ahmad & Khan, Muhammad Mushtaq & Lodhi, Mohammad Saeed, 2013. "The consequences of revenue gap in Pakistan: Unveiling the reality," Economic Modelling, Elsevier, vol. 30(C), pages 281-294.
    2. Muhammad Farooq Arby & Muhammad Jahanzeb Malik & Muhammad Nadim Hanif, 2010. "The Size of Informal Economy in Pakistan," SBP Working Paper Series 33, State Bank of Pakistan, Research Department.
    3. Ahmed Gulzar & Novaira Junaid & Adnan Haider, 2010. "What is Hidden in the Hidden Economy of Pakistan? Size, Causes, Issues, and Implications," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 49(4), pages 665-704.
    4. Rafat MAHMOOD & Eatzaz AHMAD, 2015. "Measurement Of Import Smuggling In Pakistan," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 25(2), pages 135-159.
    5. Shaikh, Salman, 2014. "Tax Increment Financing in Pakistan," MPRA Paper 53801, University Library of Munich, Germany.
    6. Shaikh, Salman, 2013. "Global Competitiveness: Challenges & Solutions for Pakistan," MPRA Paper 53796, University Library of Munich, Germany.
    7. Misbah Kiani & Adeel Ahmed & Khalid Zaman, 2015. "Combining qualitative and quantitative approaches for measuring underground economy of Pakistan," Quality & Quantity: International Journal of Methodology, Springer, vol. 49(1), pages 295-317, January.
    8. Robina Ather Ahmed & Mark Rider, 2008. "Pakistan’s Tax Gap: Estimates By Tax Calculation and Methodology," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0811, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.

    More about this item

    Keywords

    Underground economy; Tax Evasion;

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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