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Underground Economy and Tax Evasion in Pakistan A Critical Evaluation

  • M. Ali Kemal

    (Pakistan Institute of Development Economics, Islamabad)

This paper is an attempt to get fresh estimates of the underground economy and tax evasion in Pakistan. Various methodologies have been used to measure the size of the underground economy, i.e., the monetary, fiscal, and labour market approaches in particular. The monetary approach has strong assumptions but this is the best, easiest, and the most appropriate approach for estimation. The year 1973 has been chosen as the benchmark period, because the pre-1973 data on money supply is not reliable. The results obtained in the study show that the underground economy and tax evasion as a percentage of GDP have increased by 1.83 times in the last 29 years. These were the maximum in 1998 but after that, due to low level of economic activity, there was a decline. This shows that there is a strong relationship with the formal economy. The underground economy and tax evasion increased sharply from 1991 to 1998, and then declined till 2002. Between 1991 and 1998, the rate of increase in the underground economy is greater than the rate of increase in the formal economy, which is a major concern to the Government. It is recommended not to use estimates of the underground economy (estimated by any indirect methodology) for policy-making purposes, but rather to use the results to observe the overall trend of growth of the underground economy.

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File URL: http://www.pide.org.pk/Research/Report184.pdf
File Function: First Version, 2003
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Paper provided by Pakistan Institute of Development Economics in its series PIDE-Working Papers with number 2003:184.

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Length: 43 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:pid:wpaper:2003:184
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  1. Bajada, Christopher, 1999. "Estimates of the Underground Economy in Australia," The Economic Record, The Economic Society of Australia, vol. 75(231), pages 369-84, December.
  2. Andrew Dilnot & C. N. Miller, 1981. "What do we know about the black economy?," Fiscal Studies, Institute for Fiscal Studies, vol. 2(1), pages 58-73, March.
  3. Mehnaz Ahmed & Qazi Masood Ahmed, 1995. "Estimation of the Black Economy of Pakistan through the Monetary Approach," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 34(4), pages 791-807.
  4. Persson, Mats & Wissen, Pehr, 1984. " Redistributional Aspects of Tax Evasion," Scandinavian Journal of Economics, Wiley Blackwell, vol. 86(2), pages 131-49.
  5. Cowell, Frank A, 1985. "The Economic Analysis of Tax Evasion," Bulletin of Economic Research, Wiley Blackwell, vol. 37(3), pages 163-93, September.
  6. Klovland, Jan Tore, 1984. " Tax Evasion and the Demand for Currency in Norway and Sweden. Is There a Hidden Relationship?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 86(4), pages 423-39.
  7. Edgar L. Feige, 2004. "How Big IS the Irregular Economy?," Macroeconomics 0404005, EconWPA.
  8. Frank Atkins, 1999. "Macroeconomic time series and the monetary aggregates approach to estimating the underground economy," Applied Economics Letters, Taylor & Francis Journals, vol. 6(9), pages 609-611.
  9. Petersen, Hans-Georg, 1982. "Size of the Public Sector, Economic Growth and the Informal Economy: Development Trends in the Federal Republic of Germany," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 28(2), pages 191-215, June.
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