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The Underground Economy: Minimizing the Size of Government

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Abstract

In this paper we outline the results of some extensive econometric modelling that has been undertaken to establish a time-series of the size of the New Zealand Hidden Economy from 1968 to 1994. The derivation of these data has facilitated a good deal of associated research, and here we draw on those findings to comment, in particular, on the relationship between taxation policy and the effects taxes - in terms of both the overall tax burden and also the nature of the "tax mix", as between direct and indirect taxes, etc.. Our research in this area has revealed a clear and statistically significant link between high taxes and the size of the underground economy. Moreover, we have been able to establish the extent to which reductions in the tax burden, and changes to its "mix", can lower illicit activity in the economy. Interestingly, and very importantly, this in turn enables us to establish an "optimal" aggregate tax rate, if the objective is maximize the impact on the Hidden Economy. Many of the broad lessons that emerge from this research have applicability in the Canadian context, and more specific work of this type with Canadian data is currently being undertaken by the author and colleagues.

Suggested Citation

  • David E.A. Giles, 1998. "The Underground Economy: Minimizing the Size of Government," Econometrics Working Papers 9801, Department of Economics, University of Victoria.
    • Handle: RePEc:vic:vicewp:9801
    Note: ISSN 1485-6441. This is a revised version of a presentation to the Fraser Institute Conference on "How to Spend the Fiscal Dividend", Ottawa, Ontario, December 1997
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    File URL: https://www.uvic.ca/socialsciences/economics/_assets/docs/econometrics/ottawa.pdf
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    Cited by:

    1. Roberto Dell’Anno & Miguel Gómez-Antonio & Angel Alañon-Pardo, 2007. "The shadow economy in three Mediterranean countries: France, Spain and Greece. A MIMIC approach," Empirical Economics, Springer, vol. 33(1), pages 197-197, July.
    2. Dell’Anno, Roberto & Davidescu, Adriana AnaMaria, 2019. "Estimating shadow economy and tax evasion in Romania. A comparison by different estimation approaches," Economic Analysis and Policy, Elsevier, vol. 63(C), pages 130-149.
    3. Paraskevi Koufopoulou & Colin C. Williams & Athanassios Vozikis & Kyriakos Souliotis & Antonios Samprakos, 2021. "Estimating Shadow Economy Size in Greece 2000 - 2018: A Flexible MIMIC Approach," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 71(3-4), pages 23-47, July-Dece.
    4. Andreas Buehn & Friedrich Schneider, 2012. "Corruption and the shadow economy: like oil and vinegar, like water and fire?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(1), pages 172-194, February.
    5. Buehn, Andreas & Schneider, Friedrich, 2009. "Corruption and the Shadow Economy: A Structural Equation Model Approach," IZA Discussion Papers 4182, Institute of Labor Economics (IZA).
    6. Roudari, Soheil & Tehranchian, Amirmansour, 2020. "نقش اقتصاد غیررسمی بر کارآفرینی با تاکید بر شاخص کیفیت نهادی [The role of Informal Economy on Entrepreneurship with Emphasis on Institutional Quality Index]," MPRA Paper 127022, University Library of Munich, Germany, revised 21 Oct 2020.
    7. Tehranchian, Amirmansour & Roudari, Soheil & Hedayati, Hosein & Bahrami, Hedayat, 2021. "بررسی تاثیر نوسانات نرخ ارز بر میزان قاچاق کالا در کشور در شرایط تحریم [Investigating the Effect of Exchange rate Fluctuations on the Smuggling rate of Goods in the Country under Sanctions Situations]," MPRA Paper 127010, University Library of Munich, Germany, revised 07 Sep 2021.
    8. Bame-Aldred, Charles W. & Cullen, John B. & Martin, Kelly D. & Parboteeah, K. Praveen, 2013. "National culture and firm-level tax evasion," Journal of Business Research, Elsevier, vol. 66(3), pages 390-396.
    9. Mahieddine Adnan Ghecham, 2017. "The Impact of Informal Sector on Income Distribution: Could Concentration of Income be Explained by the Size of Informal Sector?," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 594-600.
    10. Soheila Kaghazian & Isa Zaghi Jojadeh & Yazdan Naghdi, 2015. "Underground Economy Estimation in Iran by Mimic Method," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 90-109.

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    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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