{ "title": "An Analysis of the Underground Economy and its Macroeconomic Consequences", "publication": "IMF Working Papers, January 1, 2003", "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/an-analysis-of-the-underground-economy-and-its-macroeconomic-consequences-16274", "canonical": "https://www.imf.org/en/publications/wp/issues/2016/12/30/an-analysis-of-the-underground-economy-and-its-macroeconomic-consequences-16274", "overlayPath": "/en/publications/wp/issues/2016/12/30/an-analysis-of-the-underground-economy-and-its-macroeconomic-consequences-16274/index.md", "summary": "This paper develops a dynamic computable general equilibrium model in which optimizing agents evade taxes by operating in the underground economy. The cost to firms of evading taxes is that they find themselves subject to credit rationing from banks.", "sections": [ { "heading": "Model and approach", "content": "- Develops a dynamic computable general equilibrium model in which optimizing agents evade taxes by operating in the underground economy.\n- Evasion feature: firms that evade taxes face credit rationing from banks as the cost of operating underground.\n- Model simulates economy-wide interactions between tax policy, underground activity, credit allocation, investment, and external balances." }, { "heading": "Core findings", "content": "- In the absence of budgetary flexibility to adjust expenditures, raising tax rates too high drives firms into the underground economy, thereby reducing the tax base.\n- Aggregate investment in the economy is lowered because of credit rationing affecting firms that operate underground.\n- Taxes that are too low eliminate the underground economy, but result in unsustainable budget and trade deficits.\n- The optimal rate of taxation, from a macroeconomic point of view, may lead to some underground activity." }, { "heading": "Policy implications and trade-offs", "content": "- There is a non-monotonic relationship between tax rates and observed tax revenue: excessively high tax rates can reduce the effective tax base by incentivizing tax evasion.\n- Budgetary flexibility to adjust expenditures can mitigate distortions from high tax rates; without such flexibility, higher tax rates risk enlarging the underground economy.\n- Policymakers face a trade-off between reducing underground activity and maintaining sustainable fiscal and external positions; setting tax rates too low may remove evasion but create unsustainable deficits.\n- Credit market frictions amplify the macroeconomic costs of underground activity by restricting firm investment through credit rationing." }, { "heading": "Publication and metadata", "content": "- Authors: Era Dabla-Norris, Andrew Feltenstein\n- Publication date: January 1, 2003\n- Series: Working Paper No. 2003/023\n- Issue: 023\n- Volume: 2003\n- Pages: 26\n- DOI: https://doi.org/10.5089/9781451844061.001\n- Stock No: WPIEA0232003\n- ISBN: 9781451844061\n- ISSN: 1018-5941\n- Subject: Banking; Budget planning and preparation; Economic sectors; Government debt management; Informal economy; Labor; Public financial management (PFM); Revenue administration; Tax evasion\n- Keywords: Budget planning and preparation; capital tax; credit rationing; firm capital; firm's capital; Government debt management; implied ownership; Informal economy; macro economy; savings rate; Tax evasion; tax rate; Underground economy; WP\n\nSource: IMF Working Paper \"An Analysis of the Underground Economy and its Macroeconomic Consequences\" by Era Dabla-Norris and Andrew Feltenstein (Working Paper No. 2003/023).\n\n---\n\n Content in this bundle\n\n- An Analysis of the Underground Economy and Its Macroeconomic Consequences - WP/03/23\n - An Analysis of the Underground Economy and Its Macroeconomic Consequences - WP/03/23 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - An Analysis of the Underground Economy and Its Macroeconomic Consequences - WP/03/23 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/an-analysis-of-the-underground-economy-and-its-macroeconomic-consequences-16274" } ], "bullets": [ "[Markdown version](/en/publications/wp/issues/2016/12/30/an-analysis-of-the-underground-economy-and-its-macroeconomic-consequences-16274/index.md)", "[Structured JSON version](/en/publications/wp/issues/2016/12/30/an-analysis-of-the-underground-economy-and-its-macroeconomic-consequences-16274/index.json)", "[Bundle manifest](/en/publications/wp/issues/2016/12/30/an-analysis-of-the-underground-economy-and-its-macroeconomic-consequences-16274/bundle-manifest.json)", "Authors: Era Dabla-Norris, Andrew Feltenstein", "Published: January 1, 2003", "Series: IMF Working Papers", "DOI: https://doi.org/10.5089/9781451844061.001", "Develops a dynamic computable general equilibrium model in which optimizing agents evade taxes by operating in the underground economy.", "Evasion feature: firms that evade taxes face credit rationing from banks as the cost of operating underground.", "Model simulates economy-wide interactions between tax policy, underground activity, credit allocation, investment, and external balances.", "In the absence of budgetary flexibility to adjust expenditures, raising tax rates too high drives firms into the underground economy, thereby reducing the tax base.", "Aggregate investment in the economy is lowered because of credit rationing affecting firms that operate underground.", "Taxes that are too low eliminate the underground economy, but result in unsustainable budget and trade deficits.", "The optimal rate of taxation, from a macroeconomic point of view, may lead to some underground activity.", "There is a non-monotonic relationship between tax rates and observed tax revenue: excessively high tax rates can reduce the effective tax base by incentivizing tax evasion.", "Budgetary flexibility to adjust expenditures can mitigate distortions from high tax rates; without such flexibility, higher tax rates risk enlarging the underground economy.", "Policymakers face a trade-off between reducing underground activity and maintaining sustainable fiscal and external positions; setting tax rates too low may remove evasion but create unsustainable deficits.", "Credit market frictions amplify the macroeconomic costs of underground activity by restricting firm investment through credit rationing.", "Authors: Era Dabla-Norris, Andrew Feltenstein", "Publication date: January 1, 2003", "Series: Working Paper No. 2003/023", "Issue: 023", "Volume: 2003", "Pages: 26", "DOI: https://doi.org/10.5089/9781451844061.001", "Stock No: WPIEA0232003", "ISBN: 9781451844061", "ISSN: 1018-5941", "Subject: Banking; Budget planning and preparation; Economic sectors; Government debt management; Informal economy; Labor; Public financial management (PFM); Revenue administration; Tax evasion", "Keywords: Budget planning and preparation; capital tax; credit rationing; firm capital; 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