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The role of tax competitiveness and neutrality in shaping the size of the shadow economy: cross-country empirical evidence

Author

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  • James W. Saunoris

    (Eastern Michigan University)

  • Zarina Nurmanova

    (Eastern Michigan University)

Abstract

This empirical paper examines the relationship between the tax competitiveness and neutrality of a country’s tax system and the size of shadow economies across countries. Utilizing panel data from 38 OECD countries spanning the years 2014 to 2017 and a two-way fixed effects two-stage least squares estimation, the findings reveal that heightened tax competition is associated with a smaller shadow economy and this effect is both statistically significant and economically important.

Suggested Citation

  • James W. Saunoris & Zarina Nurmanova, 2025. "The role of tax competitiveness and neutrality in shaping the size of the shadow economy: cross-country empirical evidence," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 49(1), pages 95-118, March.
    • Handle: RePEc:spr:jecfin:v:49:y:2025:i:1:d:10.1007_s12197-024-09695-6
    DOI: 10.1007/s12197-024-09695-6
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    More about this item

    Keywords

    Tax competition; Shadow economy; Cross-country data; Instrumental variables;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • P37 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Legal

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