Taxing the unobservable: The impact of the shadow economy on inflation and taxation

Ummad Mazhar () and Pierre-Guillaume Méon

No 12-023, Working Papers CEB from ULB -- Universite Libre de Bruxelles

Abstract: We test the notion that a government may rely less on taxes and more on inflation to finance its expenditures the larger the size of the shadow economy. In a sample of developed and developing countries over the 1999-2007 period, we indeed report a negative relation between the tax burden and the size of the shadow economy, and a positive relation between inflation and the size of the shadow economy. We provide evidence that both are conditional on central bank independence and the exchange rate regime. Both survive a series of robustness checks, controlling for reverse causality, simultaneity, level of development, and estimates of the shadow economy.

Keywords: Shadow economy; Inflation; Taxes; Inflation tax (search for similar items in EconPapers)
JEL-codes: E52 H26 H27 O17 (search for similar items in EconPapers)
Pages: 35 p.
Date: 2012-08
New Economics Papers: this item is included in nep-acc, nep-iue and nep-pbe
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Citations: View citations in EconPapers (10)

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Journal Article: Taxing the unobservable: The impact of the shadow economy on inflation and taxation (2017)
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