The Effect of Taxes and Their Components on Size of Underground Economy in Iran (1973-2003)

Underground economy affects important indexes such as formal GDP, unemployment, consumption, production and etc. Therefore it is necessary to identify elements and factors which affect underground economy to restrict it. Surveys and Studies indicate the size of Iran’s underground economy is high and taxes, quantity and quality of regulations and performance of formal economy are the important factors that affect it. At the first stage, the results of estimated model indicate that the impact of tax burden on underground economy isn’t statistically significant. But there is a statistically significant positive (negative) relationship between regulation burden (GDP growth rate) and the underground economy. In second stage, aggregate tax burden variable in primary model breakdown into its components: direct tax burden and indirect tax burden. Results of The model indicate impact of direct tax burden on underground economy isn’t statistically significant, but indirect tax burden is statistically significant and its relationship with underground economy is positive. In third stage, direct tax burden breakdown into its components: corporation tax, personal income tax, wealth tax. Also indirect tax burden breakdown into its components: commercial tax, excise tax. The results of the model indicate that the impact of direct tax burden components on underground economy isnt statistically significant. But among the indirect tax model the burden components sales tax has a statistically significant relationship with underground economy, while import tax has not.