Impact of shadow economy and corruption on tax efficiency
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Published:
Dec 28, 2021
Keywords:
tax, efficiency, shadow economy, budget, social spending, correlation
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Abstract
Shadow economy exists in any economy, having a substantial impact on legal economy. It can be conducted separately, but most often it brings about significant consequences to the economic order. It is, therefore, very important to identify the relationships among factors fostering shadow economy. The universal roots of shadow economy are generally recognised, but there is still a considerable area left to be explored. Even though much attention is paid to taxes as the main cause of shadow economy, few investigations have been dedicated to tax effectiveness in terms of social budget expenditure versus total budget revenue. The aim of the study was to investigate the dependence between social budget spending and shadow economy performance. The MIMIC approach was employed to assess the level of shadow economy in selected OECD countries. Furthermore, the correlation between overall tax burdens and shadow economy was estimated. Moreover, the correlation between social spending and tax burdens was assessed. The correlation value between overall social budget expenditure and shadow economy was calculated to be high, at –0.6682. This means quite a strong negative correlation. The higher level of social spending reduces shadow economy performance. However, the correlation level between overall tax burdens and shadow economy is positive, reaching the level of 0.4458. There is a very strong positive correlation between overall tax burdens and social budget spending, estimated at 0.8984. Based upon the results, it can be concluded that close attention should be paid to tax effectiveness and its relationship with shadow economy performance.
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Buszko, A., & Skorwider-Namiotko, J. . (2021). Impact of shadow economy and corruption on tax efficiency. Journal of Management and Financial Sciences, (42), 9–24. https://doi.org/10.33119/JMFS.2021.42.1
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References
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2. Andrews, D., Caldera Sanchex, C., Johannson, A. (2011). Towards a better understanding of the informal economy. Paris: OECD working paper ECO/WKP (2011) 42.
3. Auerbach, A. (1985). The Theory of Excess Burden and Optimal Taxation. In: A. Auerbach, M. Feldstein (Eds.). Handbook of Public Economics, vol. 1. Amsterdam: North-Holland.
4. Bacon, F. (1885). History of the Regin of King Henry VII. Cambridge: Cambridge University Press.
5. Biskup, M. (1970). Nicolai Copernici. Locationes Mansorum. Desertorum. Olsztyn: Institutum Olstiniense Nomini Albert Ketrzyński Sacrum.
6. Blaug, M. (2007). The Fundamental Theorems of Modern Welfare Economics, Historically Contemplated. History of Political Economy, 39, p. 2.
7. Bloomberg Professional Services. Retrieved from: https://www.bloomberg.com/professional/solution/content-and-data/ (accessed: 18–20.02 2020).
8. Bruno, B., Faginni, M. (2017). Education, R&D, and social progress. Eurasian Economics Review, 7, pp. 33–48.
9. Chen, H., Schneider, F. (2018). Size and Causes of Shadow Economy in China over 1978–2016: Based on the Currency Demand Method. Report 1. Beijing: Beijing University.
10. Dabla-Norris, E., Gradstein, M., Inchauste, G. (2008). What causes firms to hide output? The determinants of informality. Journal of Development Economics, 85 (1), pp. 1–27.
11. Delavallade, C. (2006). Corruption and distribution of public spending in developing countries. Journal of Economics and Finance, 30 (2), pp. 222–239.
12. Dizaji, S., Farzanegan, M., Naghavi, A. (2016). Political institutions and government spending behavior: theory and evidence from Iran. International Tax and Public Finance, 23, pp. 522–549.
13. Eilat, Y, Zinnes, C. (2000). The evolution of the shadow economy in transition countries: consequences for economic growth and donor assistance. CAER II Discussion Paper, No. 83, 3–70.
14. Farahani, M., Subramanian, S. V., Canning, D. (2010). Effects of state-level public spending on health on the mortality probability in India. Health Economics, 19 (11), pp. 1361–1376, https://doi.org/10.1002/hec.1557
15. Fonseca, M., Shaun, B. (2015). Does Using Behavioural Prompts in Pre Populated Tax Forms Affect Compliance? Results from an Artefactual Field Experiment with Real Taxpayers. 015–15. TARC.
16. Gebregziabher, F., Niño-Zarazúa, M. (2011). Social spending and aggregate welfare in developing and transition economies. World Institute for Development. Economics Research.
17. Gentry, W. (1999). Optimal Taxation. The Encyclopedia of Taxation and Tax Policy. Washington: Urban Institute Press..
18. Golias, P. (2013). The shadow economy and how to fight against it. Institute for Economic and Social Reforms.
19. Hasseldine, J. (2007). Study Into: ‘Best Practice’ in Tax Administration. National Audit Office.
20. Jajkowicz, O., Drobiszova, A. (2015). The Effect of Corruption on Government Expenditure and Allocation in OECD countries. Acta Universitates Agriculture Et Silviculture Brunensis, 63 (4), pp. 1251–1259.
21. Kelmanson, B., Kirabaeva, K., Medina, L., Mircheva, B., Weiss, J. (2019). Explaining the shadow economy in Europe: size, causes and policy options. IMF Working Paper WP/19/278, International Monetary Fund, European Department.
22. Kopczuk, W., Slemrod, J. (2006). Putting Firms into Optimal Tax Theory. American Economic Review, 96 (2), pp. 130–143.
23. Kleven, H. (2014, fall). How Can Scandinavians Tax So Much? Journal of Economic Perspectives, 28 (4), pp. 77–98.
24. Malaczewska, P. (2013). Useful Government Expenditure Influence on Shadow Economy. Quantitative Methods in Economics, XIV (2), pp. 61–69.
25. Mankiw, G. (2018). Macroeconomics. Tenth edition. New York: Worth Publishers.
26. Mankiw, N. G., Weinzierl, M., Yagan, D. (2009, May). Optimal Taxation in Theory and Practice. Working Paper.
27. Mauro, P. (1996). The Effects of Corruption on Growth, Investment, and Government Expenditure. IMF Working paper.
28. Mirrlees, J. A. (1971). An Exploration in the Theory of Optimal Income Taxation. Review of Economic Studies, 38, pp. 175–208.
29. Moene, K. O., Wallerstein, M. (2001). Targeting and political support for welfare spending. Economics of Governance, 2, pp. 33–54.
30. OECD Social Expenditure Database. Retrieved from: https://www.google.com/search?q=30.+OECD+Social+Expenditure+Database (accessed: 04.03.2020).
31. Perry, G. (Ed.). (2007). Informality: Exit and exclusion. Washington: World Bank Publications.
32. Prado, M. (2011). Government policy in the formal and informal sectors. European Economic Review, 55, pp. 1027–1176.
33. Prammer, D. (2011). Quality of taxation and the crisis: Tax shifts from a growth perspective. Taxation Papers, 29, Directorate General Taxation and Customs Union, European Commission, pp. 28–54.
34. Ramsey, F. (1927). A Contribution to the Theory of Taxation. Economic Journal, 37, pp. 41–67.
35. Schneider, F. (2014). The shadow economy: an essay. Department of Economics, Johannes Kepler University of Linz, pp. 1–23.
36. Seade, J. K. (1977). On the Shape of Optimal Tax Schedules. Journal of Public Economics, 7, pp. 203–235.
37. Slemrod, J. (1990). Optimal Taxation and Optimal Tax Systems. Journal of Economic Perspectives, 4, pp. 157–178.
38. Sørensen, P. (2010). The theory of optimal taxation: New developments and policy relevance. Nationaløkonomisk Tidsskrift, 148, pp. 212–244.
39. Stern, N. H. (1987). The Theory of Optimal Commodity and Income Taxation: An Introduction. In: D. Newbery, N. Stern (Eds.), The Theory of Taxation for Developing Countries (pp. 24–49). Oxford: Oxford University Press.
40. Trebica, B. (2014). The Size of Underground Economy in Albania. Academic Journal of Interdisciplinary Studies, 3 (4) Rome, Italy: MCSER Publishing.
41. Wilk, R., Cliggett, L. (2011). Ekonomie i kultury. Podstawy antropologii ekonomicznej. Kraków: Wydawnictwo Uniwersytetu Jagiellońskiego.
42. Wolf, A. (2004). Education and economic performance: Simplistic theories and their policy consequences. Oxford Review of Economic Policy, 20 (2), pp. 315–332.