The shadow economy in the European Union

Abstract

The underground economy is a matter of interest and a common challenge for countries. Tackling shadow economy problem is essential since it means losing a valuable source of revenue which has undoubtedly direct implications for the overall society. Given the importance and disparities of shadow economy in the 28 European Union countries, the purpose of this paper is to analyze deeply the shadow economy and its main determinants exclusively on the EU. To conduct the investigation, a database has been constructed for the period 2000-2015, with a particular focus on taxation, employment rates, governance quality and macroeconomic variables. Econometric estimations with panel data have been made. The empirical analysis suggests important results on the effect of some drivers on shadow economy, such as the remarkable negative influence of high tax burden on shadow economy. Results might shed light on ways to combat shadow economy.