By Edgar L. Feige
The essays during this quantity research the issues of defining measuring, and figuring out the consequences of the "underground economies" which are surmised to have emerged in lots of of the world's built international locations. particular reviews are integrated for the USA, Canada, the uk, Germany, France, the Netherlands, Sweden, Norway, Italy, Hungary, and the Soviet Union.
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Extra info for The Underground Economies: Tax Evasion and Information Distortion
Sample text
Closer scrutiny of the IRS estimates of unreported income by income class may provide a more precise estimate of ku. 5. Unreported income as percentage of AGI. Econometric currency ratio models. y = reported income r = rate of interest ws = income share of wages and salaries r = average effective marginal tax rate Equation (13) can be estimated to obtain a forecast of CID. A time series estimate of ko is then obtained by setting tax rates equal to zero. Tanzi's procedure relies on the assumption that unreported income depends exclusively on the rate of taxation and requires an estimate of the amount of currency that would be held if tax rates were zero.
Empirical implementation of even the simple CID method requires an estimate of ko. Gutmann (1977) follows Cagan (1958) in assuming that ko can be approximated by the actual ratio of currency to demand deposits in the period immediately preceding World War II. This approach is justified by the fact that prior to the introduction of the income tax, the incentives for unreported transactions were nil, and therefore, no unreported economy existed at this time. 4 and is labeled C:40. This simplest estimate suggests that the ratio of unreported income to reported income rose dramatically during World War II, rising above 12% of reported income.
The motives for non-reporting or misreporting of information are alleged to include tax evasion, regulatory evasion, avoidance of costs of compliance, or simply mistrust of government. Ultimately, the accuracy and coyerage of any social accounting system, regardless of the ingenuity of its design, will depend upon the cooperation and honesty of the reporting units. Whether such cooperation is eroded by the economic incentives inadvertently inherent in any system of governance or by a growing alienation from the articulated 21 EDGAR L.