A statistical approach to modeling the undergroundeconomy in South Africa

Abstract

Aim/purpose – The underground economy is a major challenge across the world affect- ing both developed and developing economies. South Africa is no exception to this phenomenon and has lost billions of rands due to the underground economy. The aim of this study is to estimate the size of the underground economy in South Africa. Design/methodology/approach – The study used quarterly time series data from 2000 to 2020 and employed the Currency Demand Approach (CDA) for modeling the under- ground economy. Findings – The model results revealed that the underground economy is positively influ- enced by unemployment rate, tax burden, and social benefits granted by the government, however it is negatively influenced by Nominal Gross Domestic Product (NGDP), deposit interest rate, and self-employment rate. Furthermore, the study showed that there was a distinct growth of the underground economy, from 23.9% of GDP in 2003 to 34.5% of GDP in 2019. On average, the underground economy represented 28.8% of GDP for the period 2003 to 2020. Research implications/limitations – This model can be used in conjunction with other models to observe the trend in the South African underground economic activities. The South African government should take note of the spiraling growth of this economy and come up with measures to curb this growth to protect the formal economy. Originality/value/contribution – This study makes a significant contribution to the body of knowledge in this research area and provides much needed insights into the magnitude of the underground economy and the extent of tax evasion in South Africa. Keywords: underground economy, South Africa, currency demand approach. JEL Classification: C32, O17, H26, C53

Taxes and social instability: How large corporations and wealthy taxpayers hide taxable money?

“…The other tax evasion strategy is the underground economy, which includes all legal and non-legal activities whose revenues escape the tax authorities (Koloane and Bodhlyera, 2022;Huynh, 2022;Williams and Schneider, 2016;Kemal, 2010;Blackburn et al, 2012). The activities concerned are illegal when they are prohibited by law (drug sales, prostitution, etc.)…”

“…Underground economy Koloane and Bodhlyera (2022), Huynh (2022), Williams and Schneider (2016), Kemal (2010), Blackburn et al(2012), Abu Alfoul et al( 2022), Torgler and Schneider (2009).…”

The Effect of Tax Avoidance and Tax Evasion on the Performance of South African Economy

“…South Africa is no exception where the country has become a high temple of tax evasion and avoidance. For example, according to Koloane and Bodhlyera (2022), the country has been losing approximately ethics, perceptions of equity and fairness referent groups, changes on government policy and political affiliation); (2) individual factors (awareness of offences and of penalties, and personal financial constraints); (3) economic factors (tax audits and perceptions government spending, and tax rates); (4) institutional factors (simplicity of tax returns and tax administration and probability of detestation and the role of tax authority); and demographical factors (income, gender, and education). High tax rates have intensified the growth of tax evasion and tax avoidance (Omodero, 2019).…”

Shadow Economy Estimation Using Cash Demand Approach: The Case of Serbia

“…Throughout the prior two decades, this approach has been widely used to estimate informality mainly in developed countries such as Tanzi [13] for the USA, Shima [20] for Norway, Klovland [21] for Norway and Sweden, Bovi and Castellucci [22] for Italy, and Bovi and Dell'Anno [23] for OECD countries. More recent studies cover developing countries such as Brambila and Cazzavilan for Mexico, Hernandez for Peru, Schneider and Bajada for Asia-Pacific countries, Koloane [24][25][26][27][28][29][30][31][32].…”

“…Estimating Equation (1) provides us with the estimated cash level in circulation C. The next step includes setting the incentive variable Θ to zero, as originally proposed by Tanzi [13] and used in many applications of the methodology. However, some relevant authors in more recent literature, such as Hernandez [25], Koloane and Bodhlyera [27], and Dybka et al [28], have criticized the hypothesis of a zero tax rate as unrealistic for any economy and suggested using some version of a minimal tax rate for which there would be no tax evasion. To estimate the shadow economy, Dybka et al [28] used the minimal recorded tax and social security contribution inflows.…”