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Fiscal illusion and the shadow economy: Two sides of the same coin?

Andreas Buehn, Roberto Dell'Anno () and Friedrich Schneider ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper presents an empirical analysis of the relationship between fiscal illusion and the shadow economy for 104 countries over the period 1989–2009. We argue that both unobservable phenomena are closely linked to each other, as the creation of a fiscal illusion may be helpful if governments want to control shadow economic activities. Using a MIMIC model with two latent variables we confirm previous findings on the driving forces of the shadow economy and identify the main determinants and indicators of fiscal illusion. Most importantly, we find that fiscal illusion negatively affects the shadow economy: Concealing the real tax burden through fiscal illusion potentially contributes to the government’s efforts to repress shadow economic activities.

Keywords: Fiscal illusion; shadow economy; MIMIC model; latent variables, tax burden, tax complexity (search for similar items in EconPapers)
JEL-codes: E62 O17 K42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-iue, nep-mac and nep-pbe
Date: 2012-11-09
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Related works:
Working Paper: Fiscal illusion and the shadow economy: Two sides of the same coin? (2013) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:42531

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