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Modelling the Hidden Economy and the Tax-Gap in New Zealand

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Abstract

This paper develops and estimates a structural, latent variable, model for the hidden economy in New Zealand, and a separate currency-demand model. The estimated latent variable model is used to generate an historical time-series index of hidden economic activity, which is calibrated via the information from the currency-demand model. Special attention is paid to data non-stationarity, and diagnostic testing. The size of the hidden economy is found to vary between 6.8% and 11.3% of measured GDP. This, in turn, implies that the total tax-gap is of the order of 6.4% to 10.2% of total tax liability in that country, though of course not all of this foregone revenue would be recoverable.

Suggested Citation

  • David E. A. Giles, 1999. "Modelling the Hidden Economy and the Tax-Gap in New Zealand," Econometrics Working Papers 9905, Department of Economics, University of Victoria.
    • Handle: RePEc:vic:vicewp:9905
    Note: ISSN 1485-6441. Earlier versions of this paper was released as University of Victoria Department of Economics Discussion Paper 97-8, April 1997, and UVic EWP9807, EWP9810.
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    Keywords

    Hidden Economy; Underground Economy; Tax Avoidance; Tax Evasion; Tax-Gap;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • H1 - Public Economics - - Structure and Scope of Government
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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