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The Learning Path of the Hidden Economy:Tax and Growth Effects in New Zealand

This paper considers the "learning curve" relationship between the aggregate tax rate and the relative size of the hidden economy in New Zealand. Some simple non-linear models are estimated so that the effects of changes in the effective tax rate on the underground economy can be simulated. We find that over half of the hidden activity in New Zealand is a learned response to changing opportunities and constraints in fiscal policy, but this amount varies over the business cycle. A zero tax rate permits us to discover the "natural rate" of underground and criminal activity. Implications are drawn for taxation policy in that country.

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Paper provided by Department of Economics, University of Victoria in its series Econometrics Working Papers with number 9805.

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Length: 24 pages
Date of creation: 22 May 1998
Date of revision:
Handle: RePEc:vic:vicewp:9805
Note: ISSN 1485-6441. This is a revised version of N.Z. Inland Revenue Department Working Paper No. 21, December 1996.
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