Fiscal policy and shadow economy in Asian developing countries: does corruption matter?
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Fiscal policy and shadow economy in Asian developing countries: does corruption matter? Cong Minh Huynh1
· Tan Loi Nguyen1
Received: 11 October 2018 / Accepted: 25 April 2019 © Springer-Verlag GmbH Germany, part of Springer Nature 2019
Abstract This article empirically studies how fiscal policy affects the shadow economy through the two tools of taxation and government expenditure, and how this effect depends on the presence of corruption. By using a panel data for 24 developing Asian countries over the period of 2002–2015, we find that the shadow economy is negatively affected by expansionary fiscal policies and positively affected by contractionary fiscal policies, extending the Voluntarist school of thought on shadow economy; and corruption and shadow economy are complements. Specifically, the tax burden from both direct and indirect taxes increases the shadow economy and the increase in corruption intensifies this effect. Furthermore, the government expenditure reduces the size of the shadow economy and the increase in corruption attenuates this effect. In addition, we find a stronger impact of indirect taxes, compared to direct taxes; a stronger effect of government expenditure, in comparison with direct and indirect taxes; and a dominating impact of corruption on the shadow economy in developing countries. The findings indicate that governments can utilize expansionary fiscal policies through appropriate combination of direct taxes, indirect taxes and government expenditure to reduce the shadow economy, provided that corruption is controlled. Keywords Corruption · Fiscal policy · Shadow economy JEL Classification E62 · D73 · H26 · O17
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s00181019-01700-w) contains supplementary material, which is available to authorized users.
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Cong Minh Huynh [email protected] Tan Loi Nguyen [email protected]
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Becamex Business School, Eastern International University, 1 Nam Ky Khoi Nghia St, Thu Dau Mot City, Binh Duong Province, Vietnam
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C. M. Huynh, T. L. Nguyen
1 Introduction The shadow economy has attracted a great attention from policy-makers and scholars because its presence distorts the allocation of resources, alters income distribution and reduces governments’ tax revenue (Alm and Embaye 2013). Moreover, it is biased to evaluate the outcome of various economic policies without considering the shadow economy since national accounts fail to capture economic activities in the shadow economy. Thus, governments—especially in developing countries—are always trying to control the size of shadow economy. According to the Voluntarism school of thought on shadow economy, the rising burden of taxes is one of the main causes for the increase of shadow economy. The higher taxes make the after-tax earnings smaller, leading to stronger incentives for people to work underground to reduce the tax wedge (Feige 1989; Tanzi 1982, 1999; Giles 1999; Schneider 2007, 2010). Therefore, fiscal policies with the two tools of ta
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