Switching on the Lights: Do Higher Income Taxes Push Economic Activity Into the Shade?

Denvil Duncan and Klara Sabirianova Peter

National Tax Journal, 2014, vol. 67, issue 2, 321-350

Abstract: This paper examines the effect of corporate income tax (CIT) rates on shadow economic activity. The paper revives the electricity consumption approach to measuring such activity with a new functional form, a larger sample of countries, a longer time span of 25 years, and the use of instrumental variables. We fnd that a 1 percentage point increase in the CIT rate increases the size of the shadow economy by 2.3 percent, which implies a tax elasticity of shadow economic activity of 0.78 at the mean CIT rate. This result suggests that efforts to reduce budget defcits with corporate tax rate increases may be offset by an increase in shadow economic activity.

Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:ntj:journl:v:67:y:2014:i:2:p:321-350

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