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Switching on the Lights: Do Higher Income Taxes Push Economic Activity Into the Shade?

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  • Denvil Duncan
  • Klara Sabirianova Peter

Abstract

This paper examines the effect of corporate income tax (CIT) rates on shadow economic activity. The paper revives the electricity consumption approach to measuring such activity with a new functional form, a larger sample of countries, a longer time span of 25 years, and the use of instrumental variables. We fnd that a 1 percentage point increase in the CIT rate increases the size of the shadow economy by 2.3 percent, which implies a tax elasticity of shadow economic activity of 0.78 at the mean CIT rate. This result suggests that efforts to reduce budget defcits with corporate tax rate increases may be offset by an increase in shadow economic activity.

Suggested Citation

  • Denvil Duncan & Klara Sabirianova Peter, 2014. "Switching on the Lights: Do Higher Income Taxes Push Economic Activity Into the Shade?," National Tax Journal, National Tax Association;National Tax Journal, vol. 67(2), pages 321-350, June.
    • Handle: RePEc:ntj:journl:v:67:y:2014:i:2:p:321-350
    DOI: 10.17310/ntj.2014.2.02
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    Cited by:

    1. Codruț-Florin Ivașcu & Sorina Emanuela Ștefoni, 2023. "Modelling the Non-Linear Dependencies between Government Expenditures and Shadow Economy Using Data-Driven Approaches," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 70(1), pages 97-114, March.
    2. Bento, Antonio M. & Jacobsen, Mark R. & Liu, Antung A., 2018. "Environmental policy in the presence of an informal sector," Journal of Environmental Economics and Management, Elsevier, vol. 90(C), pages 61-77.
    3. Dasgupta, Manjira, 2017. "Moving towards "Cashlessness" in an emerging economy: A case study of latest policy steps in India," International Cash Conference 2017 – War on Cash: Is there a Future for Cash? 162907, Deutsche Bundesbank.

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