Asymmetric responses of the underground economy to tax changes: Evidence from New Zealand data

This, paper considers the relationship between taxes and the size of the Ne w Zealand underground economy. Previous studies indicate that a positive re lationship exists in this and certain other countries. This paper addresses the question: 'Is the response of the underground economy to an increase i n taxes the same as its response to a decrease in taxes?' We find that alth ough the effect on the underground economy of an upward movement in the eff ective tax rate is numerically greater than that of a downward tax movement , this difference is not statistically significant.