The Consequences of Progressive Income Taxation for the Shadow Economy: Some Theoretical Considerations

  • Reinhard Neck
  • Friedrich Schneider
  • Markus F. Hofreither

Abstract

In recent years, both the public debate and the scientific literature have shown increased interest in the phenomenon of the shadow (underground, hidden) economy.1 As a working definition, we may say that the shadow economy consists of those economic activities which contribute to value-added and should be included in GDP or national income according to the conventions of national-income accounting, but are at present not registered by the national measurement agencies. Political concern about the size and the growth of the shadow economy arises for various reasons: apart from the general undesirability of illegal activities, there are also economic problems associated with the underground economy. For example, it may be a result or a cause of allocative and distributive distortions; the effects of stabilization policies may be different when there is a considerable amount of hidden activities; and, in general, spillovers between the shadow and the official economy must not be neglected when policy measures are being planned and implemented. Moreover, if rising tax rates lead to an increase in the extent of the shadow economy, higher tax rates may cause lower instead of higher tax revenues for the government. This possibility of a falling portion of the Laffer curve has to be taken into account when budgetary policies are under consideration.2

Keywords

Income Nite Allo Alan 

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Copyright information

© Springer-Verlag Berlin Heidelberg 1989

Authors and Affiliations

  • Reinhard Neck
    • 1
  • Friedrich Schneider
    • 1
  • Markus F. Hofreither
    • 1
  1. 1.Vienna, LinzAustria

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