A Glimpse Into the Shadow Economy

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By its very nature, the shadow economy is difficult to define. The new Special Issue of Public Finance Review, “The Shadow Economy, Tax Evasion, and Money Laundering,” introduces  research by leading scholars which attempts to clarify the causes and consequences of this global phenomenon. In the lead article, PFR Editor James Alm of Tulane University and Abel Embaye of the University of Arkansas write:

PFR_72ppiRGB_150pixwThe presence of untaxed activities—known as the shadow economy, the black economy, the underground economy , among other terms—is a common occurrence in all countries around the world. Its presence dis- torts resource allocation, changes t he distribution of income in unpredictable ways, and reduces tax collections. In response, governments take many steps to reduce its size. However, these efforts require knowledge of its size, and such estimates are quite difficult to generate. Many methods have been developed to estimate the size of the shadow economy; see especially Schneider and Enste (2000) and Schneider (2005) for comprehensive discussions of these methods and their resulting estimates. In this article , we build on this previous research. We apply dynamic panel estimation methods to the currency demand method, in order to estimate the size of the shadow economy for 111 countries for the years 1984–2006.

Read the article, “Using Dynamic Panel Methods to Estimate Shadow Economies Around the World, 1984–2006,” in the September issue of Public Finance Review, and don’t miss the rest of this Special Issue: The Shadow Economy, Tax Evasion, and Money Laundering.

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