Taxes and the Canadian Underground Economy
TAXES AND THE CANADIAN UNDERGROUND ECONOMY, Toronto: Canadian Tax Foundation, 2002
Posted: 27 Jul 2007
In this volume we report the results of an extensive empirical study into the size of the Canadian underground economy, its development from the mid-1970's to the mid-1990's, and some of the linkages between taxation policy and underground activity in this country. First, we estimate that the Canadian Underground Economy grew from about 3.5% of measured GDP in 1976, to almost 16% in 1995. The latter figure accords well with recent evidence for Canada obtained by Schneider by totally different means - he estimates that it averaged 14.8% in 1994/95 and 16.2% in 1997/98. Second, when the implications of an underground economy of this size are explored in terms of the amount of tax revenue that is lost, we find that the size of this "tax-gap" varied from approximately $2 billion in 1976 to almost $44 billion in 1995, in current-dollar terms. Third, we establish a clear and positive empirical relationship between the aggregate effective tax rate and the (relative) size of the underground economy. We have shown that there is significant statistical evidence of two-way Granger causality, both from the effective tax rate, to the underground economy; and also from the underground economy to the effective tax rate.
Keywords: Underground Economy, Structural Equation Model, Latent Variable, Tax Gap, Causality
JEL Classification: C32, O17, 051
Suggested Citation: Suggested Citation