Abstract
ABSTRACT Existing studies show the underground economy negatively affects socioeconomic development, focusing on economic and institutional aspects as underlying factors driving its existence. This study examines the relationship between tax reform and the underground economy in 23 developed and emerging countries from 1990 to 2015. Our empirical analysis indicates that tax reforms increasing the societal tax burden expand the underground economy. Notably, expanding the tax base, rather than increasing tax rates, is closely linked to this growth. These findings suggest policymakers should consider the underground economy’s response to tax reforms while promoting tax systems and policy improvements.
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