Question

Stabilizing the national economy..


What effect is an increase in tax rates likely to have on the underground economy? Why?

Answer 1

An increase in taxes is likely to increase the underground economy.

Answer 2

An increase in the tax rates on the underground will have no effect on tax revenue since 0 x tax rate = 0. Since the underground is not reported or illegal. However, underground goods and services will now be cheaper since the other goods and services will be more expensive due to the higher tax. In fact, people may buy more underground goods and services since they can be substitue goods.