Dodging the Grabbing Hand: The Determinants of Unofficial Activity in 69 Countries

Eric Friedman, Simon Johnson, Daniel Kaufmann and Pablo Zoido-Lobaton

Chapter 9 in The Economics of Transition, 2007, pp 298-334 from Palgrave Macmillan

Abstract: Abstract What drives entrepreneurs and large businesses underground? One school of thought identifies high tax rates as the main culprit. In other words, companies that operate in the unofficial economy are simply trying to keep all their profits for themselves. An alternative view holds that when unregistered economic activity rises, the political and social institutions that govern the economy are to blame. According to this theory, bureaucracy, corruption, and a weak legal system bear primary responsibility for driving businesses underground. Firm managers may be willing to be taxed at a reasonable rate, but they are unwilling to put up with constant extortionate and arbitrary demands.

Date: 2007
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DOI: 10.1057/978-1-349-74092-5_9

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