Taxes, Risk-Aversion, and the Size of the Underground Economy: A Nonparametric Analysis With New Zealand Data

David Giles and Betty J. Johnson ()

No 6, Econometrics Working Papers from Department of Economics, University of Victoria

Abstract: We use nonparametric regression analysis to investigate the relationship between the effective tax rate and the relative size of the underground economy, using New Zealand data. The theoretical underpinnings of such a relationship are established by extending some of the predictions of the recent model of Trandel and Snow (1999) to allow for the form of the available aggregate data. Time-series evidence indicates that these data are non-stationary and cointegrated, and this is taken into account in our estimation. The theoretical framework produces an ambiguous prediction regarding the sign of the relationship we are studying. However, our nonparametric empirical analysis produces a positive and "S-shaped" relationship, and this supports earlier empirical studies that imposed such functional forms. The estimated model is used to simulate the effects of hypothetical tax changes on the size of the New Zealand underground economy, and to draw policy conclusions.

Keywords: Tax evasion; underground economy; risk aversion; tax rates; nonparametric regression. (search for similar items in EconPapers)
JEL-codes: C14 C22 H26 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2000-05-11
New Economics Papers: this item is included in nep-pbe
Note: ISSN 1485-6441 ; supercedes EWP9910
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Taxes, Risk-Aversion, and the Size of the Underground Economy: A Nonparametric Analysis With New Zealand Data (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:vic:vicewp:0006

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