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Underground Economy and Tax Evasion in Pakistan A Critical Evaluation

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  • M. Ali Kemal

    (Pakistan Institute of Development Economics, Islamabad)

Abstract

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.

Suggested Citation

  • M. Ali Kemal, 2003. "Underground Economy and Tax Evasion in Pakistan A Critical Evaluation," PIDE-Working Papers 2003:184, Pakistan Institute of Development Economics.
  • Handle: RePEc:pid:wpaper:2003:184
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    References listed on IDEAS

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    Cited by:

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    2. Cyan, Musharraf R. & Koumpias, Antonios M. & Martinez-Vazquez, Jorge, 2016. "The determinants of tax morale in Pakistan," Journal of Asian Economics, Elsevier, vol. 47(C), pages 23-34.
    3. James Alm & Mir Ahmad Khan, 2008. "Assessing Enterprise Taxation and the Investment Climate in Pakistan," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0810, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    4. Khurrum S. Mughal & Friedrich G. Schneider, 2020. "How Informal Sector Affects the Formal Economy in Pakistan? A Lesson for Developing Countries," South Asian Journal of Macroeconomics and Public Finance, , vol. 9(1), pages 7-21, June.
    5. Mughal, Khurrum & Schneider, Friedrich, 2018. "Shadow Economy in Pakistan: Its Size and Interaction with Official Economy," MPRA Paper 87087, University Library of Munich, Germany.
    6. Saeed Karimi Petanlar & Ahmad Jafari Samimi & Alireza Aminkhaki, 2011. "An Estimation of Tax Evasion in Iran," Journal of Economics and Behavioral Studies, AMH International, vol. 3(1), pages 8-12.
    7. Eric Manes, . "Pakistan's Investment Climate : Laying the Foundation for Growth, Volume 2. Annexes," World Bank Other Operational Studies, The World Bank, number 12411, September.
    8. Anastasiou Athanasios & Kalamara Eleni & Kalligosfyris Charalampos, 2020. "Estimation of the size of tax evasion in Greece," Bulletin of Applied Economics, Risk Market Journals, vol. 7(2), pages 97-107.
    9. 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.
    10. Jorge Martinez-Vazquez, 2006. "Pakistan: A Preliminary Assessment of the Federal Tax System," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0624, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    11. Khurrum S. Mughal & Friedrich G. Schneider & Zafar Hayat, 2020. "Intensity of Regulations as a Cause of the Informal Sector," Journal of South Asian Development, , vol. 15(2), pages 135-154, August.

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