We study the underground economy within a dynamic and stochastic general equilibrium framework. Our model combines limited tax enforcement with an otherwise standard two- sector neoclassical stochastic growth model. The Bayesian estimation of the model based on Italian data provides evidence in favor of an important underground sector in Italy, with a size that has increased steadily over the whole sample period. We show that this pattern is due to a steady increase in taxation. Fiscal policy experiments suggest that a moderate tax cut, along with a stronger effort in the monitoring process, causes a sizeable reduction in the size of the underground economy and provides a positive stimulus for the regular economy. Both of these effects jointly increase total fiscal revenues.

Size, trend, and policy implications of the underground economy

Renzo Orsi;Davide Raggi
;
2014-01-01

Abstract

We study the underground economy within a dynamic and stochastic general equilibrium framework. Our model combines limited tax enforcement with an otherwise standard two- sector neoclassical stochastic growth model. The Bayesian estimation of the model based on Italian data provides evidence in favor of an important underground sector in Italy, with a size that has increased steadily over the whole sample period. We show that this pattern is due to a steady increase in taxation. Fiscal policy experiments suggest that a moderate tax cut, along with a stronger effort in the monitoring process, causes a sizeable reduction in the size of the underground economy and provides a positive stimulus for the regular economy. Both of these effects jointly increase total fiscal revenues.
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10278/3736579
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