Working Paper

  • 02.07.2001

    Fiscal and Regulatory Causes of the Shadow Economies in Transition Countries: The Case of Ukraine


    A model of Ukrainian shadow economy money demand is estimated that includes new regulatory burden, tax complexity, and soft-budget constraint variables. This model is analysed to determine the causes and dynamics of the Ukrainian shadow economy and to assess the effectiveness of state measures undertaken to reduce its size. We find the direct tax burden including social security contributions, the regulatory burden on enterprises, the complexity of the tax system, and soft-budget constraints for enterprises to be important causes for unofficial activity. We conclude that the lowering of the social security burden, the introduction of a presumptive tax for small and medium-sized businesses, and some hardening of budget constraints for enterprises are the main explanatory factors for the presumed decline of the shadow economy in recent months. We also conclude that the government could do more to reduce the shadow economy, foremost by lowering the effective regulatory burden on enterprises, but also by reducing the complexity of the tax system and the personal income tax burden, and by hardening further the budgetconstraints for enterprises.

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