Exploring the dark side of tax policy: an analysis of the interactions between fiscal illusion and the shadow economy

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 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. Terms of use: Documents inJEL-Code: O170, K420, E620.

Effective Transparency and Institutional Trust in Honduran Municipal Governments

“…Aside from these effects of transparency on trust, some authors, such as Buehn, Dell’Anno, and Schneider (2017), consider that the lack of transparency impacts on the loss of confidence, which in turn triggers fiscal illusion. Furthermore, agency theory shows that higher levels of information reduce information asymmetries, which limits potential conflicts of interest between principals and agents, and increases confidence in politicians (Araujo & Tejedo-Romero, 2016).…”

Estimating shadow economy in Tanzania: an analysis with the MIMIC approach

“…Following Buehn et al (2017), we specify extended versions of MIMIC models that include, among the determinants of the indicators ( Y ), and observed exogenous causes ( X ). Accordingly, we have solved a relevant issue in the use of MIMIC specification to economics application, that is, the omission of some direct effects of causes on indicators.…”

“…Full details on our model extension are available from authors upon request. See Buehn et al (2017) for the formal derivation of the extended version of the MIMIC model.…”

A Comparative Approach to Fiscal Illusions: a Synthesis of the Conclusions from a Polish Study in Relation to New Ideas and Empirical Research in Selected Countries

“…Their study showed that the tax system is more (less) progressive when taxes and public expenditures are perceived less (more) and that an increase in the median voter's income may positively or negatively affect tax progressivity, depending on whether fiscal illusion is pessimistic or optimistic. Some new and very interesting aspects of fiscal illusion have recently been brought to attention in the Buehn, Dell'Anno, and Schneider (2018, pp. 1609-1630 analysis of interactions between fiscal illusion and the shadow economy.…”