Asymmetric Responses of the Underground Economy to Tax Changes: Evidence From New Zealand Data
David Giles (),
Gugsa T. Werkneh () and
Betty J. Johnson ()
No 9911, Econometrics Working Papers from Department of Economics, University of Victoria
We consider the relationship between taxes and the size of the underground economy in New Zealand. Previous studies indicate that a positive relationship exists in this and certain other countries. We address the following question: "Is the response of the underground economy to an increase in taxes the same as its response to a decrease in taxes?" To answer this question we modify an existing methodology for testing for both "timing symmetry" and "pattern symmetry". Paying careful attention to the non-stationarity and cointegration of our annual data, we test for the presence of such symmetry in the tax-evasion relationship for New Zealand. We find that although the effect on the underground economy of an upward movement in the effective tax rate is numerically greater than that of a downward tax movement, this difference is not statistically significant in either the short-run or the long-run. Elasticity and multiplier calculations allow us to quantify some of the effects of changes in taxation policy on hidden output.
Keywords: Tax evasion; underground economy; tax rates; asymmetry (search for similar items in EconPapers)
JEL-codes: C22 H26 (search for similar items in EconPapers)
Note: ISSN 1485-6441
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Journal Article: Asymmetric Responses of the Underground Economy to Tax Changes: Evidence from New Zealand Data (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:vic:vicewp:9911
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