The role of tax competitiveness and neutrality in shaping the size of the shadow economy: cross-country empirical evidence

James W. Saunoris () and Zarina Nurmanova
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James W. Saunoris: Eastern Michigan University
Zarina Nurmanova: Eastern Michigan University

Journal of Economics and Finance, 2025, vol. 49, issue 1, No 5, 95-118

Abstract: Abstract This empirical paper examines the relationship between the tax competitiveness and neutrality of a country’s tax system and the size of shadow economies across countries. Utilizing panel data from 38 OECD countries spanning the years 2014 to 2017 and a two-way fixed effects two-stage least squares estimation, the findings reveal that heightened tax competition is associated with a smaller shadow economy and this effect is both statistically significant and economically important.

Keywords: Tax competition; Shadow economy; Cross-country data; Instrumental variables (search for similar items in EconPapers)
JEL-codes: E26 H21 P37 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s12197-024-09695-6

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