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Title:Income tax flattening: does it help to reduce the shadow economy? PDF Logo
Authors:Sabirianova Peter, Klara
Issue Date:2009
Series/Report no.:IZA discussion papers 4223
Abstract:This paper examines the effect of global transition to simpler, flatter income tax systems on the size of the shadow economy. By offering a new estimation framework, the paper revives the traditional electricity consumption approach to measuring the shadow economy. It overcomes the limitations of previous literature by using a new functional form, better quality data, a larger sample of 170 countries, a longer time span of 25 years, a panel framework, and instrumental variables. Our analysis provides strong evidence of a positive relationship between income tax rates and the size of the shadow economy. The effects of structural progressivity and complexity of national tax schedules are also found to be positive and statistically significant. These positive effects are reinforced when tax changes are accompanied by improving government services and strengthening the legal system. The flat tax is estimated to reduce the shadow economy in the short run, but this effect diminishes and disappears in the long run.
Subjects:Shadow economy
tax evasion
personal income tax
corporate income tax
flat tax
structural progressivity
tax complexity
electricity approach
institutions
JEL:D73
H1
J3
J4
O1
P2
Persistent Identifier of the first edition:urn:nbn:de:101:1-2009062240
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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