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The Learning Path of the Hidden Economy: The Tax Burden and Tax Evasion in New Zealand

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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 about 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. Simulating a zero tax rate permits us to discover the "natural rate" of underground and criminal activity. Some partial lessons are drawn for taxation policy in that country.

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  • David E. A. Giles, & Patrick J. Caragata, 1999. "The Learning Path of the Hidden Economy: The Tax Burden and Tax Evasion in New Zealand," Econometrics Working Papers 9904, Department of Economics, University of Victoria.
  • Handle: RePEc:vic:vicewp:9904
    Note: ISSN 1485-6441. This is a revised version of N.Z. Inland Revenue Department Working Paper No. 21, December 1996, and also of UVic EWP9805.
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    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
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    3. White, Kenneth J, 1992. "The Durbin-Watson Test for Autocorrelation in Nonlinear Models," The Review of Economics and Statistics, MIT Press, vol. 74(2), pages 370-373, May.
    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.
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    Cited by:

    1. Barbara Annicchiarico & Claudio Cesaroni, 2018. "Tax reforms and the underground economy: a simulation-based analysis," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(2), pages 458-518, April.
    2. 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.
    3. Kausik Chaudhuri & Friedrich Schneider, 2011. "The Size and Development of the Shadow Economy in India: A First Attempt at a Public Choice Explanation," Chapters,in: Handbook on the Shadow Economy, chapter 3 Edward Elgar Publishing.
    4. Amihai Glazer, 2008. "Reducing Current Taxes to Raise Future Revenue," Working Papers 080914, University of California-Irvine, Department of Economics.
    5. 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.
    6. 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.
    7. Salar, Laleena & Zaman, Khalid & Khilji, Bashir Ahmad & Khan, Muhammad Mushtaq & Lodhi, Mohammad Saeed, 2013. "The consequences of revenue gap in Pakistan: Unveiling the reality," Economic Modelling, Elsevier, vol. 30(C), pages 281-294.
    8. Oludele Akinloye Akinboade, 2015. "Correlates of Tax Compliance of Small and Medium Size Businesses in Cameroon," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 13(4 (Winter), pages 389-413.
    9. Lipatov, Vilen, 2008. "Social Interaction in Tax Evasion," MPRA Paper 8829, University Library of Munich, Germany.
    10. Lipatov, Vilen, 2003. "Evolution of Tax Evasion," MPRA Paper 966, University Library of Munich, Germany, revised 06 Dec 2005.
    11. Ratbek Dzhumashev & Emin Gahramanov, 2010. "A Growth Model with Income Tax Evasion: Some Implications for Australia," The Economic Record, The Economic Society of Australia, vol. 86(275), pages 620-636, December.

    More about this item

    Keywords

    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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