The Consequences of Progressive Income Taxation for the Shadow Economy

Abstract

The seminal paper of Allingham and Sandmo (1972) characterised the phenomenon of tax evasion as though it were a game of roulette, with the tax loader as an idle gambler and the government — or its tax authority — acting as a rather clumsy croupier. Much of the subsequent literature has been devoted to the development of richer models of the underlying economic problems based on the Allingham-Sandmo insights. The Neck et al. paper in this volume pursues one of the more important themes that have emerged in this literature: and understanding of the role that the underground sector plays in an economy with production is central to many policy questions that are commonly raised in taxation analysis. If we do not know what the linkage is between the public sector and the underground sector, then propositions about the linkages between the public sector and the “official” private sector are likely to be seriously misleading.