ABSTRACT
Existing studies show the underground economy negatively affects socioeconomic development, focusing on economic and institutional aspects as underlying factors driving its existence. This study examines the relationship between tax reform and the underground economy in 23 developed and emerging countries from 1990 to 2015. Our empirical analysis indicates that tax reforms increasing the societal tax burden expand the underground economy. Notably, expanding the tax base, rather than increasing tax rates, is closely linked to this growth. These findings suggest policymakers should consider the underground economy’s response to tax reforms while promoting tax systems and policy improvements.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1. Here, the underground economy can be referred to by various names, such as hidden, shadow, unofficial, informal, and black-market economy.
2. This study focuses primarily on the economic and institutional viewpoints on the causes of the underground economy. However, while paying attention to economic and institutional features, it is essential to acknowledge that other variables are also significant. For example, psychological aspects, such as tax morale, constitute a major factor contributing to the underground economy (Torgler and Schneider Citation2009; Torgler, Schneider, and Schaltegger Citation2010).
3. The study transforms this information into numerical figures and applies them to a rigorous empirical framework, contributing to a more comprehensive understanding of the dynamics at play.
4. Based on the common assumption, the inequality direction of each term is as follows: , , , .
5. and represent the extent of absolute risk aversion, given by and , respectively. Based on the assumption that the absolute risk aversion decreases as income increases, .
6. The countries examined in this research include Australia, Austria, Brazil, Canada, China, Czechia, Denmark, France, Greece, Germany, India, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, Poland, Portugal, Spain, Turkey, the United Kingdom, and the United States.
7. The indicator provides a value of “1” if the presidential or congressional election is held and “0” otherwise.