Do Increased Tax Base and Reductions in the Underground Economy Compensate for Lost Tax Revenue Following a Tax Reduction Policy? Evidence from Italy 1982 to 2006

Renzo Orsi and Knut Lehre Seip ()
Additional contact information
Knut Lehre Seip: Department of Technology, Arts and Design, Oslo Metropolitan University, P.O. Box 4, St. Olavs Plass, Pilestredet Park 33, 0176 Oslo, Norway

Economies, 2023, vol. 11, issue 7, 1-19

Abstract: We here examine the frequent claim that an increase in the tax base and a decrease in tax evasion will compensate for a loss in tax revenues caused by a lower tax level. Using a unique data set for the estimated underground economy in Italy from 1982 to 2006, we found that a loss in tax revenues equivalent to 1% of the GDP would be partly compensated by an increase in GDP of 0.55%. The compensation would come from 0.31% of the GDP increase and from 0.24% of the reductions in the underground economy. These results apply to an economy with a high tax level (>32%) and a high underground economy (≥25%). Applying a high-resolution lead–lag method to the data, we ensured that tax changes were leading the GDP and, thus, a potential cause for changes in the GDP.

Keywords: tax policy; GDP; underground economy; tax evasion; self-financing (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2227-7099/11/7/177/pdf (application/pdf)
https://www.mdpi.com/2227-7099/11/7/177/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jecomi:v:11:y:2023:i:7:p:177-:d:1180631

Access Statistics for this article

Economies is currently edited by Ms. Adore Zhou

More articles in Economies from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().