Indirect Tax Incidence under Inelastic Underground Economy Demand

Gerasimos Soldatos

MPRA Paper from University Library of Munich, Germany

Abstract: This paper demonstrates theoretically that a profit tax does not affect the distribution of the firm’s operations between the official and the underground economy. Or, if the firm was initially operating only officially, direct taxation of its business would not be a reason to go underground. Indirect taxation in the form of a sales tax does influence an already existing mix of official and underground activities, favoring the latter. And, it does constitute a reason to “go underground” for an otherwise fully official business. This is a thesis robust to market structure changes and to introducing tax evasion in the usual sense, provided the underground demand is inelastic. The tax authority can still collect the planned tax revenue through a combination of a cash-flow tax with indirect taxation, under only consumer-surplus loss by the underground customer.

Keywords: Inelastic underground demand; Business-tax shift; Tax policy (search for similar items in EconPapers)
JEL-codes: D21 E26 H26 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-iue, nep-mac and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:64598

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