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Simulating the Relationship Between the Hidden Economy and the Tax Level and Tax Mix in New Zealand




In this paper we consider a simple Logistic relationship between the relative size of the Hidden Economy in New Zealand, and the effective tax rates for the major tax components. The model that we estimate from annual time-series data is used to simulate the effects of changes in both the overall tax "burden", and in the tax "mix", on the size of the Hidden Economy as a percentage of measured GDP in that country. At recent taxation levels, we find that for every percentage point reduction in the tax/GDP ratio, the Hidden Economy/GDP ratio drops by about 0.2 percentage points. We also find that the latter ratio is very responsive to changes in the tax "mix" in favour of relatively more indirect taxation; and that at an effective tax rate of about 21% of GDP, the impact of tax changes on underground activity begins to decelerate. The latter results suggests a tax evasion-efficient frontier for the tax/GDP ratio in New Zealand.

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  • 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.
  • Handle: RePEc:vic:vicewp:9804 Note: ISSN 1485-6441. This is a revised version of N.Z. Inland Revenue Department Working Paper No. 22, December 1996.

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    Cited by:

    1. Maurizio Bovi, 2007. "National accounts, fiscal rules and fiscal policy. Mind the hidden gaps," ISAE Working Papers 76, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
    2. Giles, David E A & Werkneh, Gugsa T & Johnson, Betty J, 2001. "Asymmetric Responses of the Underground Economy to Tax Changes: Evidence from New Zealand Data," The Economic Record, The Economic Society of Australia, vol. 77(237), pages 148-159, June.
    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 E.A. Giles, 1998. "The Underground Economy: Minimizing the Size of Government," Department Discussion Papers 9801, Department of Economics, University of Victoria.
    5. 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.
    6. 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.
    7. David Giles & Patrick Caragata, 2001. "The learning path of the hidden economy: the tax burden and tax evasion in New Zealand," Applied Economics, Taylor & Francis Journals, vol. 33(14), pages 1857-1867.
    8. Johannah Branson & C. Lovell, 2001. "A Growth Maximising Tax Structure for New Zealand," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(2), pages 129-146, March.
    9. Robert Draeseke & David E. A. Giles, 1999. "A Fuzzy Logic Approach to Modelling the Underground Economy," Econometrics Working Papers 9909, Department of Economics, University of Victoria.

    More about this item


    Hidden Economy; Underground Economy; Tax Evasion; Tax Gap;

    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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