An estimation of the underground economy and tax evasion

Abstract

PurposeThis paper aims to use an econometric model to estimate tax evasion from the size of the underground economy and examined the factors that trigger it.Design/methodology/approachThe study used time series data sourced from world development indicators and Bank of Ghana covering the period 1990-2015 to estimate tax evasion from the underground economy using an autoregressive distributed lag model drawing on the currency demand approach.FindingsThe results confirmed the existence of a large underground economy and a high incidence of tax evasion in Ghana. The Ghanaian situation has been aggravated by an underground economy-triggering factor of mobile money activities, which increased by 83.1 per cent in 2015. Tax evasion averaged 20.78 per cent of GDP over the period. The study, thus, concludes that the increased number of mobile money activities, high tax burden and unemployment contribute to the worsening of the tax evasion problem in Ghana.Originality/valueThe study is one of the premier attempts to introduce electricity power consumption variables in the currency demand model to estimate tax evasion from the size of the underground economy. The authors hypothesize that the emergence of mobile money activities in its current form triggers underground and tax-evading activities. The study, thus, calls for the formalization and regulation of the operations of mobile money activities in emerging economies as a way of managing the underground economy, which incubates tax evasion.