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The impact of the shadow economy on the direct-indirect tax mix: Can central banks’ independence mitigate the effect?

Author

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  • Dokas, Ioannis
  • Panagiotidis, Minas
  • Papadamou, Stephanos
  • Spyromitros, Eleftherios

Abstract

The recent financial crisis caused by corruption and opacity has led us to examine how the informal economy and other factors affect tax revenues using a three-pillar theoretical analysis. Empirical research has not thoroughly explored the shadow economy's impact on direct and indirect taxes, tax revenues, and the central bank's independence from the shadow economy and tax collection. This paper used 2010–2018 data from 129 countries. The shadow economy and tax revenues had a substantial negative relationship. The shadow economy also changed the fiscal authorities' policy mix by reducing direct taxes and increasing indirect taxes. Finally, the central bank's independence mitigated the shadow economy's negative effects on tax revenues.

Suggested Citation

  • Dokas, Ioannis & Panagiotidis, Minas & Papadamou, Stephanos & Spyromitros, Eleftherios, 2024. "The impact of the shadow economy on the direct-indirect tax mix: Can central banks’ independence mitigate the effect?," Journal of Policy Modeling, Elsevier, vol. 46(3), pages 475-493.
    • Handle: RePEc:eee:jpolmo:v:46:y:2024:i:3:p:475-493
    DOI: 10.1016/j.jpolmod.2024.03.001
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    More about this item

    Keywords

    Tax revenues; Shadow economy; Central bank independence; Democracy; Panel cointegration;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • O50 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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