Currency Demand, the Subterranean Economy and Tax Evasion: The Case of Tanzania
Abstract. This paper estimates the magnitude of, and changes to the subterranean economy in Tanzania, as well as its adverse effect on tax revenue during the 1966-2015 period. To achieve this objective, the paper applies currency -ratio due to Gutmann and the traditional currency-demand approach à la Tanzi. Despite their differences, both approaches suggest the existence of a substantial size of the subterranean economy in Tanzania. This persistent large size of the subterranean economy is an important consequence of economic and social policies over the period of study. Using the currency-demand approach, the paper finds that tax evasion is positively correlated with the size and growth of the subterranean economy. Indeed, results show that the size of the subterranean economy and the magnitude of tax evasion over the 1966-2015 period, are on average, 32.7 percent and 6.6 percent of official GDP respectively. The implication of the results is that minimization of the size of the subterranean economy is necessary for effective addressing the problem of tax evasion and subsequent fiscal deficit in the long run.
Keywords: Subterranean economy, Currency demand deposits, Currency demand approach, Tax evasion.
JEL. E26, E41, H26, K42, O17.
ActionAid, (2010). Calling time: why SABMiller should stop dodging taxes in Africa. ActionAid, United Kingdom, London.
Ahumada, H., Alvarado, F., & Canavese, A. (2006). The demand for currency spproach and the size of the shadow economy: a critical assessment. Berkeley Program in Law & Economics, working paper series, paper no. 192. University of California, Berkeley.
Ariyo, A., & Bekoe, W. (2012). Currency demand, the underground Economy and tax evasion: case of Nigeria. Journal of Monetary and Economic Integration, 2(2), 130-157.
Bagachwa, M., & Naho, A. (1995). Estimating the second economy in Tanzania. World Development, 23(8), 1387-1399. doi. 10.1016/0305-750X(95)00055-H
Bajada, C. (1999). Estimates of the underground economy in Australia. Economic Record, 75, 369-384. doi. 10.1111/j.1475-4932.1999.tb02573.x
Barbosa, E., Pereira, S., & Brandao, E. (2013). The shadow economy in Portugal: an analysis using the MIMIC model. FEP working papers, Paper No.514.
Belv, B. (2003). The informal economy in the EU accession countries: size, scope, trends and challenges to the process of E.U. Enlargement, Center for Study of Democracy, Sofia.
Blackburn, K., Bose, N., & Capasso, S. (2012). Tax evasion, the underground economy and financial development. Journal of Economic Behaviour & Organization, 83 (2), 243-253. doi. 10.1016/j.jebo.2012.05.019
Buehn, A., & Schneider, F. (2008). MIMIC models, cointegration and error correction: an application to the French economy. IZA discussion paper series, IZA DP No.3306, 1-30.
Cagan, P. (1958). The demand for currency relative to the total money supply. Journal of Political Economy, 66(4), 303-328. doi. doi.10.1086/258056
Cebula, R.J. (1997). An empirical analysis of the impact of Government tax and auditing policies on the size of the underground economy: the case of the United States, 1993-94. American Journal of Economics and Sociology, 56(2), 173-185. doi. 10.1111/j.1536-7150.1997.tb03459.x
Chipeta, C. (2002). The second economy and tax yield in Malawi. AERC research paper no. 113, African Economic Research Consortium, Nairobi.
Chiumya, C.C.N. (2007). The parallel economy in Malawi: size, effect on tax revenue and policy options. International Graduate School of Social Sciences, Yokohama National University. MPRA.
Dabla-Norris, E., & Feltenstein, A. (2003). An analysis of the underground economy and its macroeconomic consequences, IMF Working Paper, No.wp/03/23.
Dreher, A., & Schneider, F. (2010). Corruption and the shadow economy: an empirical analysis. Public Choice, 144(1), 215-238. doi. 10.1007/s11127-009-9513-0
Eilat, Y., & Zinnes, C. (2000). The evolution of the shadow economy in transition countries: consequences for economic growth and donor assistance. CAER II discussion paper no. 83, Harvard Institute for International Development.
Elgin, C., & Öztunali, O. (2012). Shadow economies around the world: model based estimates. Working papers 2012/05, Bogazici University, Department of Economics.
Faal, E. (2003). Currency demand, the underground economy and tax evasion: the case of Guyana. IMF WP/03/7, International Monetary Fund.
Feige, E.L. (1979). How big is the irregular economy?, Challenge, 22, 5-13. doi. 10.1080/05775132.1979.11470559
Feige, E., & Urban, I. (2003). Estimating the size and growth of unrecorded economic activity in transition countries: a re-evaluation of electric consumption method estimates and their implications. William Davidson Institute, working paper no. 636.
Finlayson, J.A., & Peacock, K. (2002). How big is the hidden economy? Policy Perspectives, 9(3). Vancouver: Business Council of British Columbia.
Friedman, E., Johnson, S., Kaufmann, D., & Zoido-Lobaton, P. (2000). Dodging the grabbing hand: the determinants of unofficial activity in 69 countries. Journal of Public Economics, 76(3), 59-493. doi. 10.1016/S0047-2727(99)00093-6
Gërxhani, K. (2004). The informal sector in developed and less developed countries: a literature survey. Public Choice, 120 (3), 267-300. doi. 10.1023/B:PUCH.0000044287.88147.5e
Giles, D.E.A. (1999). Measuring the hidden economy: implications for econometric modeling. The Economic Journal, 109 (456), 370-380. doi. 10.1111/1468-0297.00440
Gutmann, P.M. (1977). The subterranean economy. Financial Analysts Journal, 33(6), 26-27+34.
Hanousek, J., & Palda, F. (2004). Quality of government services and the civic duty to pay taxes in the Czech and Slovak republics, and other transition countries. Kyklos, 57(2), 237-252. doi. 10.1111/j.0023-5962.2004.00252.x
Hill, R., & Kabir, M. (1996). Tax rates, the tax mix, and the growth of the underground economy in Canada: what can we infer? Canadian Tax Journal/Revue Fiscale Canadienne, 44(6), 1552-1583.
Ihendinihu, J.U., & Dudafa, W. (2008). Impact assessment of emerging tax issues in underground economy in Nigeria. The Nigerian Journal of Financial Research. 6(1). 35-45.
Iqbal, Z., & Qureshi, S.K. (1998). The underground economy and tax evasion in Pakistan: a fresh assessment. PIDE research report no. 158.
IMF, (2011). Revenue mobilisation in developing countries. International Monetary Fund. Washington, D.C.
Johnson, S., Kaufmann, D., & Shleifer, A. (1997). The unofficial economy in transition. Brookings Papers on Economic Activity, Fall, Washington D.C.
Johnson, S. Kaufmann, D., & Pablo, Z. (1998). Regulatory discretion and the unofficial economy. The American Economic Review, 88(2), 387-392.
Kitine, H.B. (1993). A study of the underground economy in Tanzania: an empirical estimation. Ph.D. Thesis, Simon Fraser University, Economics Department.
Kirchgässner, G. (1983). Size and development of the West German shadow economy, 1955-1980. Journal of Institutional and Theoretical Economics, 139(2), 197-214.
Klovland, J.T. (1984). Tax evasion and the demand for currency in Norway and Sweden: is there a hidden relationship? Scandinavian Journal of Economics, 86(4), 423-439. doi.10.2307/3439653
Lippert, O., & Walker, M. (1997). The underground economy: global evidence of its size and impact. Vancouver: Fraser Institute.
Loayza, N.V. (1996). The economics of the informal sector: a simple model and some empirical evidence from Latin America. Carnegie-Rochester Conference Series on Public Policy 45, 129-162.
Öğünç, F., & Yilmaz, G. (2000). Estimating the underground economy in Turkey. discussion paper no.12, Research Department, the Central Bank of the Republic of Turkey.
Osoro, N.E. (1995). Tax reforms in Tanzania: motivations, directions and implications. African Economic Research Consortium, Research Paper No.38.
Ott, K. (2004). The evolution of the informal economy and tax evasion in Croatia. eJournal of Tax Research, 2(1), 113-124.
Ott, K. (2002). The underground economy in Croatia. Occasional paper no. 12, Institute of Public Finance, Croatia.
Ott, K. (1998). Economy policy and unofficial economy in transition: the case of Croatia. Paper Presented at the Bled Slovenia International Conference, Institute of Public Finance, Bled Slovenia.
Restrepo-Echavarria, P. (2015). Measuring underground economy can be done, but it is difficult. Federal Reserve Bank of St. Louis, Central to America’s Economy.
Schneider, F., Buehn, A., & Montenegro, C. (2010). New estimates for the shadow economies all over the world. International Economic Journal, 24(4), 443-61. doi. 10.1080/10168737.2010.525974
Schneider, F., & Enste, D.H. (2000). Shadow economies: size, causes, and consequences. Journal of Economic Literature, 38(1), 77-114. doi. 10.1257/jel.38.1.77
Schneider, F. (2005). Shadow economies around the world: what do we really know? European Journal of Political Economy, 21(3), 598-642. doi. 10.1016/j.ejpoleco.2004.10.002
Schneider, F. (2008). Shadow economy. In: C. K. Rowley and F. Schneider, (Eds). Readings in Public Choice and Constitutional Political Economy. ch. 28, 511-32.
Schneider, F., & Enste, D. (2002). The shadow economy: theoretical approaches, empirical studies, and political implications. Cambridge (UK): Cambridge University Press.
Schneider, F. (2000). Illegal activities, but still value added ones (?): Size, causes, and measurement of the shadow economies all over the world. CESifo Working Paper Series, No.305, 1-48.
Schneider, F. (1986). Estimating the size of the Danish shadow economy using the currency demand approach: an attempt. The Scandinavian Journal of Economics, 88(4), 643-668. doi. 10.2307/3440435
Schneider, F., & Enste, D. (1999). Shadow economies around the world: size, causes, and consequences. IMF Working Paper, No.wp/00/26.
Shabsigh, G. (1995). The underground economy: estimation, and economic and policy implications: the case of Pakistan. IMF working papers, No. WP/95/101.
Singh, A., Jain-Chandra, S., & Adil, M. (2012). Inclusive growth, institutions, and the underground economy. IMF Working Paper, WP/12/47, International Monetary Fund.
Smith, P. (1994). Assessing the size of the underground economy: the Canadian statistical perspectives. Canadian Economic Observer, Catalogue No.13-604-MIB- No.28.
Tadesse, H., & Taube, G. (1997). Presumptive taxation in sub-Saharan Africa: experiences and prospects. IMF Working Papers, International Monetary Fund, 1-49. doi. 10.5089/9781451842135.001
Tanzi, V. (1980). The underground economy in the united states: estimates and implications. PSL Quarterly Review, 33(135), 427-453.
Tanzi, V. (1983). The underground economy in the United States: annual estimates, 1930-80. Staff Papers, International Monetary Fund, 30(2), 283-305. doi. 10.2307/3867001
Tanzi, V., & Schuknecht, L. (1997). Reconsidering the fiscal role of government: the international perspective. American Economic Review, 87(2), 164-168.
Thomas, J. (1999). Quantifying the black economy: measurement without theory yet again?. The Economic Journal, 109(456), 381-389. doi. 10.1111/1468-0297.00441
Torgler, B., Schneider, F., & Schaltegger, C.A. (2009). Local autonomy, tax morale, and the shadow economy. Public Choice, 144 (1-2), 293-321. doi. 10.1007/s11127-009-9520-1
Vuletin, G. (2008). Measuring the informal economy in Latin America and the Caribbean, Western Hemisphere Department, IMF Working Paper, WP/08/102, 1-29. doi. 10.5089/9781451869637.001
World Bank, (2004). Doing Business in 2005: Removing the Obstacles to Growth. 1st ed., Washington: World Bank
Zoido-Lobaton, P., Johnson, S., & Kaufmann, D. (1999). Corruption, public finances and the unofficial economy. Washington, D.C., the World Bank, policy research working paper. doi. 10.1596/1813-9450-2169
- There are currently no refbacks.
Journal of Economic and Social Thought - J. Econ. Soc. Thoug. - JEST - www.kspjournals.org
Copyright © KSP Library