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Exploring the dark side of tax policy: an analysis of the interactions between fiscal illusion and the shadow economy

Author

Listed:
  • Andreas Buehn

    (University of Cooperative Education Bautzen)

  • Roberto Dell’Anno

    (University of Salerno)

  • Friedrich Schneider

    (Johannes Kepler University of Linz)

Abstract

This paper presents an empirical analysis of the relationship between fiscal illusion and the shadow economy for 104 countries over the period 1989–2009. We argue that both unobservable phenomena are closely linked to each other, as the creation of a fiscal illusion may be helpful if governments want to control shadow economic activities. Using a MIMIC model with two latent variables, we confirm previous findings on the driving forces of the shadow economy and identify the main determinants and indicators of fiscal illusion. Most importantly, we find that fiscal illusion negatively affects the shadow economy and that the shadow economy positively affects fiscal illusion. Concealing the real tax burden, we find that an increase in taxation increases both shadow economic activities and fiscal illusion.

Suggested Citation

  • Andreas Buehn & Roberto Dell’Anno & Friedrich Schneider, 2018. "Exploring the dark side of tax policy: an analysis of the interactions between fiscal illusion and the shadow economy," Empirical Economics, Springer, vol. 54(4), pages 1609-1630, June.
    • Handle: RePEc:spr:empeco:v:54:y:2018:i:4:d:10.1007_s00181-017-1277-7
    DOI: 10.1007/s00181-017-1277-7
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    References listed on IDEAS

    as
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    9. Raj Chetty, 2009. "The Simple Economics of Salience and Taxation," NBER Working Papers 15246, National Bureau of Economic Research, Inc.
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    14. Tanzi, Vito, 1999. "Uses and Abuses of Estimates of the Underground Economy," Economic Journal, Royal Economic Society, vol. 109(456), pages 338-347, June.
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    18. Dollery, Brian E & Worthington, Andrew C, 1996. "The Empirical Analysis of Fiscal Illusion," Journal of Economic Surveys, Wiley Blackwell, vol. 10(3), pages 261-297, September.
    19. Roberto Dell’Anno & Brian Dollery, 2014. "Comparative fiscal illusion: a fiscal illusion index for the European Union," Empirical Economics, Springer, vol. 46(3), pages 937-960, May.
    20. Richard Wagner, 1976. "Revenue structure, fiscal illusion, and budgetary choice," Public Choice, Springer, vol. 25(1), pages 45-61, March.
    21. Seater, John J, 1993. "Ricardian Equivalence," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 142-190, March.
    22. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
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    Cited by:

    1. Mawejje Joseph & Odhiambo Nicholas M., 2020. "Fiscal Reforms and Deficits in Tanzania: An Exploratory Review," Studia Universitatis „Vasile Goldis” Arad – Economics Series, Sciendo, vol. 30(1), pages 57-75, March.
    2. Aysel Amir & Korhan Gökmenoğlu, 2023. "Analyzing the Drivers of the Shadow Economy for the Case of the CESEE Region," Journal of Economics / Ekonomicky casopis, Institute of Economic Research, Slovak Academy of Sciences, vol. 71(2), pages 155-181, February.
    3. Roberto Dell’Anno & Majid Maddah, 2022. "Natural resources, rent seeking and economic development. An analysis of the resource curse hypothesis for Iran," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 15(1), pages 47-65, January.
    4. Hotak, Nematullah & Kaneko, Shinji, 2022. "Fiscal illusion of the stated preferences of government officials regarding interministerial policy packages: A case study on child labor in Afghanistan," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 285-298.
    5. Roberto Dell’Anno, 2020. "Corruption around the world: an analysis by partial least squares—structural equation modeling," Public Choice, Springer, vol. 184(3), pages 327-350, September.
    6. Korhan K. Gokmenoglu & Aysel Amir, 2023. "Investigating the Determinants of the Shadow Economy: The Baltic Region," Eastern European Economics, Taylor & Francis Journals, vol. 61(2), pages 181-198, March.

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    More about this item

    Keywords

    Fiscal illusion; Shadow economy; MIMIC model; Latent variables; Tax burden; Tax complexity;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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