The asymmetric impact of tax burden structures on the shadow economy: a panel analysis of old and new European Union countries

ABSTRACT

This study tests the asymmetric impact of the tax burden structures under the forms of direct, indirect, and social contributions, upon the shadow economy. For this purpose, a panel dataset analysis of the 27 European Union (EU) Member States is conducted over the 2005–2018 time period. Our study supports the existence of a U-shaped relationship between tax burden and shadow economy only for the case of direct taxes, while for indirect taxes and social contributions, an inverted U-shaped relationship is validated. We also highlight different values of the resilience thresholds for all categories of taxes and contributions among the new EU members compared to the old ones. For direct taxes, the threshold beyond which the level of shadow economy increases is 2.61 times lower for new EU countries than for the old countries. In addition, both for the new and old EU countries, a level of indirect taxes beyond a threshold of 15.04% and 16.52%, respectively, would determine a decrease in the level of the shadow economy. The robustness checks performed using many control variables consolidate our results. Our findings are important for policy-makers to find the level of resilience of various states under different types of tax burden structures.

KEYWORDS:

• Tax burden
• shadow economy
• direct taxes
• indirect taxes
• social contributions
• U-shaped relationship

JEL CLASSIFICATION:

• H26
• E62

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplemental data

Supplemental data for this article can be accessed online at https://doi.org/10.1080/13504851.2022.2094876

Additional information

Funding

This work was supported by the Romanian Ministry of Education and Research, CNCS – UEFISCDI [PN-III-P4-ID-PCE-2020-2174].