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Evaluation of the Underground Economy in Quebec: A Microeconomic Approach

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  • Bernard Fortin
  • Guy Lacroix
  • Dominique Pinard

Abstract

The main purpose of this paper is to estimate the size and the growth of Quebec's underground economy, and the corresponding loss of taxes for the government. Our approach is based on a method developed by Pissarides and Weber (1989) and extended by Lyssiotou et al. (2004). The basic hypothesis is that individuals can under-report their earnings from self-employment but not from paid work, from which taxes are directly deducted. We estimate a consumer demand system in which the marginal propensity to consume is allowed to vary with the two types of earnings. We next estimate the amount of self-employment earnings that are under-reported. From this estimate, we calculate the relative size of the underground economy in Quebec. We use data from Statistics Canada's Survey of Household Spending. According to our results, Quebec's underground economy amounted to 4.6% of GDP in 1997 and increased slightly to 5.7% in 2002. For the government, this represents approximately $3.3 billion in forgone taxes for the year 2002. This estimate is very close to those reported by Gervais (1994) and Fortin and Lacroix (2009) using very different estimation methods and data.

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  • Bernard Fortin & Guy Lacroix & Dominique Pinard, 2010. "Evaluation of the Underground Economy in Quebec: A Microeconomic Approach," International Economic Journal, Taylor & Francis Journals, vol. 24(4), pages 463-479.
    • Handle: RePEc:taf:intecj:v:24:y:2010:i:4:p:463-479
    DOI: 10.1080/10168737.2010.525983
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    1. Panayiota Lyssiotou & Panos Pashardes & Thanasis Stengos, 2004. "Estimates of the black economy based on consumer demand approaches," Economic Journal, Royal Economic Society, vol. 114(497), pages 622-640, July.
    2. Friedrich Schneider & Dominik Enste, 1999. "Shadow Economies Around the World - Size, Causes, and Consequences," CESifo Working Paper Series 196, CESifo.
    3. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-529, October.
    4. Lewbel, Arthur, 1990. "Full Rank Demand Systems," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 289-300, May.
    5. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, October.
    6. Peter S. Spiro, 1996. "Monetary Estimates of the Underground Economy: A Critical Evaluation," Canadian Journal of Economics, Canadian Economics Association, vol. 29(s1), pages 171-175, April.
    7. James Banks & Richard Blundell & Arthur Lewbel, 1997. "Quadratic Engel Curves And Consumer Demand," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 527-539, November.
    8. Pissarides, Christopher A. & Weber, Guglielmo, 1989. "An expenditure-based estimate of Britain's black economy," Journal of Public Economics, Elsevier, vol. 39(1), pages 17-32, June.
    9. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
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    Cited by:

    1. Hans-Georg Petersen & Ulrich Thiessen, 2010. "Editors' Introduction: Shadow Economy in High Income Countries - Much Ado about Nothing?," International Economic Journal, Taylor & Francis Journals, vol. 24(4), pages 413-419.
    2. Quintano, Claudio & Mazzocchi, Paolo, 2013. "The shadow economy beyond European public governance," Economic Systems, Elsevier, vol. 37(4), pages 650-670.
    3. Odd E Nygård & Joel Slemrod & Thor O Thoresen, 2019. "Distributional Implications of Joint Tax Evasion," The Economic Journal, Royal Economic Society, vol. 129(620), pages 1894-1923.
    4. Claudio Quintano & Paolo Mazzocchi, 2018. "Behind the GDP: some remarks on the shadow economy in Mediterranean countries," European Journal of Law and Economics, Springer, vol. 45(1), pages 147-173, February.
    5. Anna Kireenko & Yuriy Ivanov & Ekaterina Nevzorova & Olga Polyakova, 2017. "Shadow Economy in the Regions of the Russian Federation and the Ukraine," Springer Proceedings in Business and Economics, in: David Procházka (ed.), New Trends in Finance and Accounting, chapter 0, pages 301-312, Springer.
    6. Lee A. Swanson & Vincent Bruni-Bossio, 2019. "A Righteous Undocumented Economy," Journal of Business Ethics, Springer, vol. 160(1), pages 225-237, November.
    7. Tufan Ekici & Mustafa Besim, 2016. "A Measure of the Shadow Economy in a Small Economy: Evidence from Household-Level Expenditure Patterns," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 62(1), pages 145-160, March.

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    More about this item

    Keywords

    Underground economy; demand system; household behaviour; generalized methods of moments; tax evasion; self-employment income;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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