Shadows and shortfalls: Unraveling the relationship between informal economies and fiscal capacity
DOI:
https://doi.org/10.54957/educoretax.v5i4.1481Keywords:
Informal Economy, Shadow Economy, Tax Policy, Tax RevenueAbstract
This research aims to analyze the effect of the shadow economy on tax revenue through a Systematic Literature Review (SLR) approach. The shadow economy, which encompasses unrecorded and unreported economic activities, has a significant impact on a country's fiscal capacity. The SLR method was used by conducting a systematic search of the Scopus, Web of Science, and Science Direct databases for publications from 2010-2024. From 1,235 identified articles, 42 articles were extracted and analyzed in depth based on established inclusion and exclusion criteria. The review results show that the shadow economy consistently correlates negatively with tax revenue, with varying magnitudes of influence based on country characteristics, economic structure, and taxation systems. Determinant factors that strengthen this relationship include high tax burdens, regulatory complexity, corruption, low institutional effectiveness, and the level of public tax awareness. This study also identifies several effective tax policy mechanisms in mitigating the negative effects of the shadow economy, including digitalization of tax administration, enhancing the capacity of tax authority institutions, and voluntary compliance programs. The theoretical and practical implications of these findings provide a comprehensive information foundation for policymakers in designing optimal tax revenue strategies amid informal economy challenges.
References
Ahmed, R. A., & Rider, M. (2013). Using microdata to estimate the size of the shadow economy: Do tax incentives matter? In F. Schneider & C. Williams (Eds.), The Shadow Economy (pp. 79-107). Edward Elgar Publishing.
Allingham, M. G., & Sandmo, A. (1972). Income tax evasion: A theoretical analysis. Journal of Public Economics, 1(3-4), 323-338. https://doi.org/10.1016/0047-2727(72)90010-2
Alm, J., Bernasconi, M., Laury, S., Lee, D. J., & Wallace, S. (2017). Culture, compliance, and confidentiality: Taxpayer behavior in the United States and Italy. Journal of Economic Behavior & Organization, 140, 176-196. https://doi.org/10.1016/j.jebo.2017.05.018
Alm, J., Kirchler, E., Muehlbacher, S., Gangl, K., Hofmann, E., Kogler, C., & Pollai, M. (2019). Tax compliance and measures of behavioral economics. Journal of Economic Psychology, 70, 186-198. https://doi.org/10.1016/j.joep.2018.12.007
Alm, J., & Torgler, B. (2011). Do ethics matter? Tax compliance and morality. Journal of Business Ethics, 101(4), 635-651. https://doi.org/10.1007/s10551-011-0761-9
Artavanis, N. T. (2018). VAT rates and tax evasion: Evidence from the restaurant industry in Greece. Journal of the European Economic Association, 16(6), 1764-1810. https://doi.org/10.1093/jeea/jvx021
Aslam, A., Coady, D., Gupta, S., & Mehdi, S. (2018). The shadow economy: Measurement, causes and policy options. IMF Working Paper, No. 18/210. https://doi.org/10.5089/9781484378724.001
Awasthi, R., & Engelschalk, M. (2018). Taxation and the shadow economy: How the tax system can stimulate and enforce the formalization of business activities. World Bank Policy Research Working Paper, No. 8391. https://doi.org/10.1596/1813-9450-8391
Berdiev, A. N., Goel, R. K., & Saunoris, J. W. (2018). Corruption and the shadow economy: One-way or two-way street? World Development, 107, 37-47. https://doi.org/10.1016/j.worlddev.2018.02.027
Bird, R. M., & Zolt, E. M. (2015). Fiscal contracting in Latin America. World Development, 67, 323-335. https://doi.org/10.1016/j.worlddev.2014.10.011
Brun, J. F., & Diakité, M. (2016). Tax potential and tax effort: An empirical estimation for non-resource tax revenue and VAT's revenue. Études et Documents, n° 10, CERDI. https://halshs.archives-ouvertes.fr/halshs-01332053
Buehn, A., Dell'Anno, R., & Schneider, F. (2016). Exploring the dark side of tax policy: An analysis of the interactions between fiscal illusion and the shadow economy. Empirical Economics, 54(4), 1609-1630. https://doi.org/10.1007/s00181-017-1277-7
Chen, S., Shi, X., & Yang, D. (2022). Digital payment and tax compliance: Evidence from China's universal e-invoice reform. Journal of Public Economics, 215, 104732. https://doi.org/10.1016/j.jpubeco.2022.104732
Chuenjit, P. (2014). The culture of taxation: Definition and conceptual approaches for tax administration. Journal of Population and Social Studies, 22(1), 14-34. https://doi.org/10.14456/jpss.2014.4
D'Attoma, J. (2020). More than a technical problem: Tax reforms, fairness, and tax morale in the United States. Governance, 33(2), 329-345. https://doi.org/10.1111/gove.12450
Dabla-Norris, E., & Feltenstein, A. (2005). The underground economy and its macroeconomic consequences. Journal of Policy Reform, 8(2), 153-174. https://doi.org/10.1080/13841280500086388
Dell'Anno, R., Gómez-Antonio, M., & Pardo, A. (2007). The shadow economy in three Mediterranean countries: France, Spain and Greece. A MIMIC approach. Empirical Economics, 33(1), 51-84. https://doi.org/10.1007/s00181-006-0084-3
Dreher, A., & Schneider, F. (2010). Corruption and the shadow economy: An empirical analysis. Public Choice, 144(1-2), 215-238. https://doi.org/10.1007/s11127-009-9513-0
Evans, C. (2003). Studying the studies: An overview of recent research into taxation operating costs. eJournal of Tax Research, 1(1), 64-92.
Feige, E. L. (2016). Reflections on the meaning and measurement of unobserved economies: What do we really know about the "shadow economy"? Journal of Tax Administration, 2(1), 5-41.
Fleming, M. H., Roman, J., & Farrell, G. (2000). The shadow economy. Journal of International Affairs, 53(2), 387-409.
Gaspar, V., Jaramillo, L., & Wingender, P. (2016). Tax capacity and growth: Is there a tipping point? IMF Working Paper, No. 16/234. https://doi.org/10.5089/9781475558173.001
Gupta, S., Jalles, J. T., Mulas-Granados, C., & Schena, M. (2018). Governments and promised fiscal consolidations: Do they mean what they say? IMF Working Paper, No. 18/50. https://doi.org/10.5089/9781484342572.001
Hassan, M., & Schneider, F. (2016). Size and development of the shadow economies of 157 countries worldwide: Updated and new measures from 1999 to 2013. IZA Discussion Paper, No. 10281. https://doi.org/10.2139/ssrn.2861026
Ihrig, J., & Moe, K. S. (2004). Lurking in the shadows: The informal sector and government policy. Journal of Development Economics, 73(2), 541-557. https://doi.org/10.1016/j.jdeveco.2003.04.004
Jacobs, A., Crawford, I., Murdoch, T., Hodges, Y., & Lethbridge, C. (2021). From the ground up: Measuring tax gaps in developing economies. TADAT Secretariat Technical Note, No. 3. https://www.tadat.org/assets/files/TN3.pdf
Johnson, S., Kaufmann, D., & Zoido-Lobatón, P. (1998). Regulatory discretion and the unofficial economy. American Economic Review, 88(2), 387-392.
Kanbur, R., & Keen, M. (2014). Thresholds, informality, and partitions of compliance. International Tax and Public Finance, 21(4), 536-559. https://doi.org/10.1007/s10797-014-9314-3
Kaufmann, D., & Kaliberda, A. (1996). Integrating the unofficial economy into the dynamics of post-socialist economies: A framework of analysis and evidence. World Bank Policy Research Working Paper, No. 1691. https://doi.org/10.1596/1813-9450-1691
Kitchenham, B., & Charters, S. (2007). Guidelines for performing systematic literature reviews in software engineering. Keele University and Durham University Joint Report, Technical Report EBSE-2007-01.
Kleven, H. J., Knudsen, M. B., Kreiner, C. T., Pedersen, S., & Saez, E. (2011). Unwilling or unable to cheat? Evidence from a tax audit experiment in Denmark. Econometrica, 79(3), 651-692. https://doi.org/10.3982/ECTA9113
Kogler, C., Batrancea, L., Nichita, A., Pantya, J., Belianin, A., & Kirchler, E. (2013). Trust and power as determinants of tax compliance: Testing the assumptions of the slippery slope framework in Austria, Hungary, Romania and Russia. Journal of Economic Psychology, 34, 169-180. https://doi.org/10.1016/j.joep.2012.09.010
La Porta, R., & Shleifer, A. (2014). Informality and development. Journal of Economic Perspectives, 28(3), 109-126. https://doi.org/10.1257/jep.28.3.109
Liu, Y., Lu, H., & Veenstra, K. (2023). How blockchain technology enhances audit effectiveness: A systematic literature review and field evidence. Journal of Information Systems, 37(1), 121-150. https://doi.org/10.2308/ISYS-19-083
Lopez-Luzuriaga, A., & Scartascini, C. (2019). Compliance spillovers across taxes: The role of penalties and detection. Journal of Economic Behavior & Organization, 164, 518-534. https://doi.org/10.1016/j.jebo.2019.06.015
Mazhar, U., & Méon, P. G. (2017). Taxing the unobservable: The impact of the shadow economy on inflation and taxation. World Development, 90, 89-103. https://doi.org/10.1016/j.worlddev.2016.08.019
Medina, L., & Schneider, F. (2018). Shadow economies around the world: What did we learn over the last 20 years? IMF Working Paper, No. 18/17. https://doi.org/10.5089/9781484338636.001
Medina, L., & Schneider, F. (2019). Shedding light on the shadow economy: A global database and the interaction with the official one. CESifo Working Paper, No. 7981.
Mironov, M., & Zhuravskaya, E. (2016). Corruption in procurement and the political cycle in tunneling: Evidence from financial transactions data. American Economic Journal: Economic Policy, 8(2), 287-321. https://doi.org/10.1257/pol.20140188
Moher, D., Liberati, A., Tetzlaff, J., & Altman, D. G. (2009). Preferred reporting items for systematic reviews and meta-analyses: The PRISMA statement. PLoS Medicine, 6(7), e1000097. https://doi.org/10.1371/journal.pmed.1000097
Pluye, P., Robert, E., Cargo, M., Bartlett, G., O'Cathain, A., Griffiths, F., Boardman, F., Gagnon, M. P., & Rousseau, M. C. (2011). Proposal: A mixed methods appraisal tool for systematic mixed studies reviews. McGill University, Montreal.
Popay, J., Roberts, H., Sowden, A., Petticrew, M., Arai, L., Rodgers, M., Britten, N., Roen, K., & Duffy, S. (2006). Guidance on the conduct of narrative synthesis in systematic reviews. A product from the ESRC methods programme, University of Lancaster.
Putnins, T. J., & Sauka, A. (2015). Measuring the shadow economy using company managers. Journal of Comparative Economics, 43(2), 471-490. https://doi.org/10.1016/j.jce.2014.04.001
Schneider, F. (2005). Shadow economies around the world: What do we really know? European Journal of Political Economy, 21(3), 598-642. https://doi.org/10.1016/j.ejpoleco.2004.10.002
Schneider, F., & Buehn, A. (2018). Shadow economy: Estimation methods, problems, results and open questions. Open Economics, 1(1), 1-29. https://doi.org/10.1515/openec-2017-0001
Schneider, F., & Enste, D. H. (2000). Shadow economies: Size, causes, and consequences. Journal of Economic Literature, 38(1), 77-114. https://doi.org/10.1257/jel.38.1.77
Slemrod, J., Blumenthal, M., & Christian, C. (2017). Taxpayer response to an increased probability of audit: Evidence from a controlled experiment in Minnesota. Journal of Public Economics, 79(3), 455-483. https://doi.org/10.1016/s0047-2727(99)00107-3
Slemrod, J., & Yitzhaki, S. (2002). Tax avoidance, evasion, and administration. In A. J. Auerbach & M. Feldstein (Eds.), Handbook of Public Economics (Vol. 3, pp. 1423-1470). Elsevier.
Torgler, B., & Schneider, F. (2007). What shapes attitudes toward paying taxes? Evidence from multicultural European countries. Social Science Quarterly, 88(2), 443-470. https://doi.org/10.1111/j.1540-6237.2007.00466.x
Torgler, B., & Schneider, F. (2009). The impact of tax morale and institutional quality on the shadow economy. Journal of Economic Psychology, 30(2), 228-245. https://doi.org/10.1016/j.joep.2008.08.004
Tranfield, D., Denyer, D., & Smart, P. (2003). Towards a methodology for developing evidence-informed management knowledge by means of systematic review. British Journal of Management, 14(3), 207-222. https://doi.org/10.1111/1467-8551.00375
Vousinas, G. L. (2017). Shadow economy and tax evasion. The Achilles heel of Greek economy. Determinants, effects and policy proposals. Journal of Money Laundering Control, 20(4), 386-404. https://doi.org/10.1108/JMLC-11-2016-0047
Williams, C. C., & Horodnic, I. A. (2015). Explaining and tackling the shadow economy in Estonia, Latvia and Lithuania: A tax morale approach. Baltic Journal of Economics, 15(2), 81-98. https://doi.org/10.1080/1406099X.2015.1114714
Williams, C. C., & Horodnic, I. A. (2016). Cross-country variations in the participation of small businesses in the informal economy: An institutional asymmetry explanation. Journal of Small Business and Enterprise Development, 23(1), 3-24. https://doi.org/10.1108/JSBED-02-2015-0021
Williams, C. C., & Horodnic, I. A. (2017). Evaluating the relationship between social exclusion and participation in the informal sector in the European Union. International Journal of Manpower, 38(3), 489-503. https://doi.org/10.1108/IJM-10-2015-0179
Williams, C. C., & Schneider, F. (2016). Measuring the global shadow economy: The prevalence of informal work and labour. Edward Elgar Publishing.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2025 Alif Sukhairi Wijaya, Suparna Wijaya
This work is licensed under a Creative Commons Attribution 4.0 International License.
