Illuminating the shadows in U.S. States
What forces the businesses to hidein the shadows? There are two competing theories trying to explainthis behavior, one identifying high tax burdenand the other corruptionas the main force.As Friedman et al. (2000) and Dreher et al. (2008) argue, according to the first theory, businesses are simply not willing to pay high taxes and keep all of their profits to themselves. According to the second theory, they are actually willing to pay taxes, but not willing to pay bribes.In this study, we investigate the relationship between corruption and the size of the shadow economy in U.S. states using a new and novel Shadow Economy Index (SEI) which is developed based on satellite data on night lights.We find that there is a complementary relationship between corruption and the size of the shadow economy across U.S. states supporting the results of Johnson et al. (1998) and Friedman et al. (2000) which use cross country data.
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