Me and my shadow: estimating the size of the U.S. hidden economy from time series data

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Abstract
Introduction In the last few years a growing concern over the phenomenon of the shadow (or hidden) economy has arisen, and as a consequence this topic has received increased attention among public officials, politicians, and social scientists. For the United States, like many other industrial countries, there are several important reasons why politicians and the public in general should be concerned about the growth and size of the shadow economy. Among the most important of these are: If an increase in the size of the shadow economy is mainly caused by a rise in the tax burden, an increased tax rate may lead to a decrease in tax receipts and thus further increase the budget deficit. If economic policy measures are based on mistaken “officially measured” indicators (such as unemployment), these measures may be at least of a wrong magnitude. In such a situation a prospering shadow economy may cause a severe problem for political decision makers because it leads to quite unreliable officially measured indicators, so that even the direction of intended policy measures may be questionable. The rise of the shadow economy can be seen as a reaction of individuals to their overburdening by state activities (such as high taxes and an increasing number of state regulations).

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