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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

Abstract: 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)
Date: 1999-08-11
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) Downloads
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