Underground Economy and Tax Administration

Around the world economies, underground economy is a fiscal problem peculiar to the developing countries. But almost all countries, independent of whether developed, developing or transition, face a remarkably large size of the underground economy. Underground economy has two main disadvantages: Not only it cut downs the tax revenues but also it causes the tax equity to worse off and threatens the legitimacy of the tax system. So, it emerges for government interventions like tax policy, direct regulations or institutional arrangements. In this paper, we expand the analysis of underground economy one step further to put forward a remedy for the underground economy: Some efforts must be made to increase tax compliance such as, establishing the simplicity of the tax system, encouraging the compliant motives of the taxpayers, powering different behaviour patterns with respect to different income levels and stipulating efficient administration of the reforms.