Exploring the Dark Side of Tax Policy: An Analysis of the Interactions between Fiscal Illusion and the Shadow Economy

22 Pages Posted: 14 Aug 2015

See all articles by Andreas Buehn

Andreas Buehn

University of Cooperative Education Bautzen

Roberto Dell'Anno

University of Salerno - Department of Economics; Institute for Corruption Studies

Friedrich Schneider

Johannes Kepler University Linz - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for the Study of Labor (IZA)

Date Written: August 13, 2015

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 the shadow economy positively affects fiscal illusion. Concealing the real tax burden we find that an increase of taxation increases both shadow economic activities and fiscal illusion.

Keywords: fiscal illusion, shadow economy, MIMIC model, latent variables, tax burden, tax complexity

JEL Classification: O170, K420, E620

Suggested Citation

Buehn, Andreas and Dell'Anno, Roberto and Schneider, Friedrich G., Exploring the Dark Side of Tax Policy: An Analysis of the Interactions between Fiscal Illusion and the Shadow Economy (August 13, 2015). CESifo Working Paper Series No. 5466, Available at SSRN: https://ssrn.com/abstract=2643339

Andreas Buehn

University of Cooperative Education Bautzen ( email )

Loebauer Strasse 1
Bautzen, 02625
Germany

Roberto Dell'Anno (Contact Author)

University of Salerno - Department of Economics ( email )

Via John Paul II 132
Fisciano (SA), 84084
Italy
+45 8942 1133 (Phone)
+45 8613 6334 (Fax)

Institute for Corruption Studies

Stevenson Hall 425
Normal, IL 61790-4200
United States

Friedrich G. Schneider

Johannes Kepler University Linz - Department of Economics ( email )

Altenbergerstrasse 69
A-4040 Linz, 4040
Austria
+43 732 2468 8210 (Phone)
+43 732 2468 8208 (Fax)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Institute for the Study of Labor (IZA)

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

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