The Impact of Tax Morale and Institutional Quality on the Shadow Economy

Abstract

This paper analyses how tax morale and countries' institutional quality affect the shadow economy, controlling in a multivariate analysis for a variety of potential factors. The literature strongly emphasizes the quantitative importance of these factors to understand the size and development of the shadow economy. Relatively new data sources that have become available offer an exceptional opportunity to shed more light on a topic that is attracting increasing attention. We find strong support for the assertion that a higher tax morale and a higher institutional quality lead to a smaller shadow economy.

Keywords: shadow economy, tax morale, institutional quality, government intervention, corruption

JEL Classification: D73, D78, H2, H26, O17, O5