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Modelling the Underground Economies in Canada and New Zealand: A Comparative Analysis

Author

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  • Lindsay M. Tedds
  • David E. A. Giles

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Abstract

Recently there has been a resurgence of interest internationally in measuring the size of the underground economies. This has led to new approaches to this problem, and a more rigorous treatment of the associated time-series issues. In this paper we compare our recent underground economy results for Canada and New Zealand. These results provide time-series measures of the (legally-based plus illegally-based) underground economies in those countries, over similar historical periods, obtained via the same methodology. This methodology involves the estimation of structural MIMIC models, calibrated by estimating nonlinear currency-demand models. In addition to providing the underground economy measures themselves, we also compare the medium-term trends and cyclical characteristics of underground output in these two countries, and their responsiveness to changes in taxation policies. Special attention is paid to the effects on the New Zealand and Canadian underground economies of the Goods and Services Taxes in 1986 and 1991 respectively. These taxes are virtually identical in their design, but the context of their implementation led to quite different impacts on the associated underground economies.

Suggested Citation

  • Lindsay M. Tedds & David E. A. Giles, 2000. "Modelling the Underground Economies in Canada and New Zealand: A Comparative Analysis," Econometrics Working Papers 0003, Department of Economics, University of Victoria.
  • Handle: RePEc:vic:vicewp:0003 Note: ISSN 1485-6441
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    File URL: http://www.uvic.ca/socialsciences/economics/assets/docs/econometrics/ewp0003.pdf
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    References listed on IDEAS

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    1. David E. A. Giles, 1999. "Modelling the hidden economy and the tax-gap in New Zealand," Empirical Economics, Springer, vol. 24(4), pages 621-640.
    2. Zellner, Arnold, 1970. "Estimation of Regression Relationships Containing Unobservable Independent Variables," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(3), pages 441-454, October.
    3. David Giles & Lindsay Tedds & Gugsa Werkneh, 2002. "The Canadian underground and measured economies: Granger causality results," Applied Economics, Taylor & Francis Journals, vol. 34(18), pages 2347-2352.
    4. David Giles, 1997. "Causality between the measured and underground economies in New Zealand," Applied Economics Letters, Taylor & Francis Journals, vol. 4(1), pages 63-67.
    5. Giles, David E A, 1997. "Testing for Asymmetry in the Measured and Underground Business Cycles in New Zealand," The Economic Record, The Economic Society of Australia, vol. 73(222), pages 225-232, September.
    6. Goldberger, Arthur S, 1972. "Structural Equation Methods in the Social Sciences," Econometrica, Econometric Society, vol. 40(6), pages 979-1001, November.
    7. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
    8. David E. A. Giles & Betty J. Johnson, 1999. "Taxes, Risk-Aversion, and the Size of the Underground Economy: A Nonparametric Analysis With New Zealand Data," Econometrics Working Papers 9910, Department of Economics, University of Victoria.
    9. Giles, David E A, 1999. "Measuring the Hidden Economy: Implications for Econometric Modelling," Economic Journal, Royal Economic Society, vol. 109(456), pages 370-380, June.
    10. Kesselman, Jonathan R., 1989. "Income tax evasion : An intersectoral analysis," Journal of Public Economics, Elsevier, vol. 38(2), pages 137-182, March.
    11. David E. A. Giles, & Patrick J. Caragata, 1998. "The Learning Path of the Hidden Economy:Tax and Growth Effects in New Zealand," Econometrics Working Papers 9805, Department of Economics, University of Victoria.
    12. Jung, Young H. & Snow, Arthur & Trandel, Gregory A., 1994. "Tax evasion and the size of the underground economy," Journal of Public Economics, Elsevier, vol. 54(3), pages 391-402, July.
    13. Watson, Harry, 1985. "Tax evasion and labor markets," Journal of Public Economics, Elsevier, vol. 27(2), pages 231-246, July.
    14. Rolf Mirus & Roger S. Smith & Vladimir Karoleff, 1994. "Canada's Underground Economy Revisited: Update and Critique," Canadian Public Policy, University of Toronto Press, vol. 20(3), pages 235-252, September.
    15. Patrick J. Caragata, & David E. A. Giles, 1998. "Simulating the Relationship Between the Hidden Economy and the Tax Level and Tax Mix in New Zealand," Econometrics Working Papers 9804, Department of Economics, University of Victoria.
    16. Trandel, Greg & Snow, Arthur, 1999. "Progressive income taxation and the underground economy," Economics Letters, Elsevier, vol. 62(2), pages 217-222, February.
    17. Frey, Bruno S. & Weck-Hanneman, Hannelore, 1984. "The hidden economy as an 'unobserved' variable," European Economic Review, Elsevier, vol. 26(1-2), pages 33-53.
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    Cited by:

    1. Davidescu, Adriana Anamaria & Schneider, Friedrich, 2017. "Nature of the Relationship between Minimum Wage and the Shadow Economy Size: An Empirical Analysis for the Case of Romania," IZA Discussion Papers 11247, Institute for the Study of Labor (IZA).
    2. Unger Brigitte, 2009. "Money Laundering - A Newly Emerging Topic on the International Agenda," Review of Law & Economics, De Gruyter, vol. 5(2), pages 807-819, December.
    3. Nikopour, Hesam, 2003. "Measuring the size of underground economy in Iran with emphasis on the incentives for evasion of insurance premium payment (1961 – 2001)," MPRA Paper 13176, University Library of Munich, Germany, revised 05 Feb 2009.
    4. Corina - Maria Ene & Andrei Stefanescu, 2011. "Size And Implication Of Underground Economy In Romania - A Mimic Approach," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(13), pages 1-8.

    More about this item

    Keywords

    underground economy; tax evasion; MIMIC models; goods and services tax;

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • H1 - Public Economics - - Structure and Scope of Government
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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