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Taxes, Risk-Aversion, and the Size of the Underground Economy: A Nonparametric Analysis With New Zealand Data

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  • David E. A. Giles

    ()

  • Betty J. Johnson

    ()

Abstract

We use nonparametric regression analysis to investigate the relationship between the effective tax rate and the relative size of the underground economy, using New Zealand data. The theoretical underpinnings of such a relationship are established by extending some of the predictions of the recent model of Trandel and Snow (1999) to allow for the form of the available aggregate data. Time-series evidence indicates that these data are non-stationary and cointegrated, and this is taken into account in our estimation. The theoretical framework produces an ambiguous prediction regarding the sign of the relationship we are studying. However, our nonparametric empirical analysis produces a positive and "S-shaped" relationship, and this supports earlier empirical studies that imposed such functional forms. The estimated model is used to simulate the effects of hypothetical tax changes on the size of the New Zealand underground economy, and to draw policy conclusions.

Suggested Citation

  • 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.
  • Handle: RePEc:vic:vicewp:9910
    Note: ISSN 1485-6441
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    References listed on IDEAS

    as
    1. 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.
    2. 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.
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    6. David E. A. Giles, 1998. "Modelling the Tax Compliance Profiles of New Zealand Firms: Evidence from Audit Records," Econometrics Working Papers 9803, Department of Economics, University of Victoria.
    7. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
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    24. 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.
    25. Trandel, Greg & Snow, Arthur, 1999. "Progressive income taxation and the underground economy," Economics Letters, Elsevier, vol. 62(2), pages 217-222, February.
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    Citations

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    Cited by:

    1. 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.
    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. Trinh Le, 2007. "Does New Zealand have a household saving crisis?," Macroeconomics Working Papers 23081, East Asian Bureau of Economic Research.
    4. Karine Torosyan & Randall K. Filer, 2014. "Tax reform in Georgia and the size of the shadow economy," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 22(1), pages 179-210, January.
    5. Sandra Sookram & Patrick Kent Watson, 2008. "Small-Business Participation in the Informal Sector of an Emerging Economy," Journal of Development Studies, Taylor & Francis Journals, vol. 44(10), pages 1531-1553.

    More about this item

    Keywords

    Tax evasion; underground economy; risk aversion; tax rates; nonparametric regression.;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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