Evaluation of the Underground Economy in Quebec: A Microeconomic Approach

24 Pages Posted: 27 Dec 2010

See all articles by Bernard Fortin

Bernard Fortin

Université Laval - Département d'Économique; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Guy Lacroix

Université Laval - Département d'Économique; IZA Institute of Labor Economics

Dominique Pinard

affiliation not provided to SSRN

Abstract

The main purpose of this paper is to estimate the size and the growth of Quebec’s underground economy, and the corresponding loss of taxes for the government. Our approach is based on a method developed by Pissarides and Weber (1989) and extended by Lyssiotou et al. (2004). The basic hypothesis is that individuals can under-report their earnings from self-employment but not from paid work, from which taxes are directly deducted. We estimate a consumer demand system in which the marginal propensity to consume is allowed to vary with the two types of earnings. We next estimate the amount of self-employment earnings that are under-reported. From this estimate, we calculate the relative size of the underground economy in Quebec. We use data from Statistics Canada's Survey of Household Spending. According to our results, Quebec's underground economy amounted to 4.6% of GDP in 1997 and increased slightly to 5.7% in 2002. For the government, this represents approximately $3.3 billion in forgone taxes for the year 2002. This estimate is very close to those reported by Gervais (1994) and Fortin and Lacroix (2009) using very different estimation methods and data.

Keywords: underground economy, demand system, household behavior, generalized method of moments, tax evasion, income from self-employment

JEL Classification: D12, E26, H26

Suggested Citation

Fortin, Bernard and Lacroix, Guy and Pinard, Dominique, Evaluation of the Underground Economy in Quebec: A Microeconomic Approach. IZA Discussion Paper No. 5384, Available at SSRN: https://ssrn.com/abstract=1731188

Bernard Fortin (Contact Author)

Université Laval - Département d'Économique ( email )

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National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics

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Guy Lacroix

Université Laval - Département d'Économique ( email )

2325 Rue de l'Université
Ste-Foy, Quebec G1K 7P4 G1K 7P4
Canada
418-656-2024 (Phone)
418-656-7798 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Dominique Pinard

affiliation not provided to SSRN ( email )

No Address Available

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