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Empirical Economics

, Volume 54, Issue 4, pp 1609–1630 | Cite as

Exploring the dark side of tax policy: an analysis of the interactions between fiscal illusion and the shadow economy

  • Andreas Buehn
  • Roberto Dell’AnnoEmail author
  • Friedrich Schneider
Article

Abstract

This paper presents an empirical analysis of the relationship between fiscal illusion and the shadow economy for 104 countries over the period 1989–2009. We argue that both unobservable phenomena are closely linked to each other, as the creation of a fiscal illusion may be helpful if governments want to control shadow economic activities. Using a MIMIC model with two latent variables, we confirm previous findings on the driving forces of the shadow economy and identify the main determinants and indicators of fiscal illusion. Most importantly, we find that fiscal illusion negatively affects the shadow economy and that the shadow economy positively affects fiscal illusion. Concealing the real tax burden, we find that an increase in taxation increases both shadow economic activities and fiscal illusion.

Keywords

Fiscal illusion Shadow economy MIMIC model Latent variables Tax burden Tax complexity 

JEL Classification

O17 K42 E62 

Notes

Acknowledgements

We would like to thank an anonymous reviewer for providing insightful comments and suggestions. Any remaining errors or inaccuracies are, of course, our own.

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Copyright information

© Springer-Verlag GmbH Germany 2017

Authors and Affiliations

  • Andreas Buehn
    • 1
  • Roberto Dell’Anno
    • 2
    Email author
  • Friedrich Schneider
    • 3
  1. 1.Department of Public ManagementUniversity of Cooperative Education BautzenBautzenGermany
  2. 2.Department of Economics and Statistics and CELPEUniversity of SalernoFiscianoItaly
  3. 3.Department of EconomicsJohannes Kepler University of LinzLinzAustria

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