Vincentas Rolandas Giedraitis

Department of theoretical economics, Faculty of economics and business administration, Vilnius University,

Lithuania

vincas.giedraitis@evaf.vu.lt

ORCID 0000-0002-0293-0645

Mitigating the shadow: Exploring taxes as solutions

Andriy Stavytskyy

Department of Economic cybernetics, Faculty of Economics,

Taras Shevchenko National University of Kyiv,

Ukraine

a.stavytskyy@gmail.com

ORCID 0000-0002-5645-6758

Ganna Kharlamova

Department of Economic Cybernetics, Faculty of Economics, Taras Shevchenko National University of Kyiv, 

Ukraine

ganna.kharlamova@knu.ua

ORCID 0000-0003-3614-712X

Erstida Ulvidienė

Department of theoretical economics, Faculty of economics and business administration, Vilnius University, 

Lithuania

erstida.ulvidiene@evaf.vu.lt

ORCID 0000-0003-2172-465X

Andrew Jorgenson

Department of Sociology, University of British Columbia,

Canada;

Department of Theoretical Economics, Faculty of Economics and Business Administration, Vilnius University,

Lithuania

andrew.jorgenson@ubc.ca

ORCID 0000-0002-5902-3704

Abstract. Nations attempt to attract major enterprises to their territories by implementing lower tax rates while simultaneously enhancing tax collection efficiency within their jurisdictional boundaries. In this study, we scrutinize the correlation between the Baltic countries’ tax systems and the levels of the shadow economy inherent to their respective economic landscapes. Our analysis indicates that tax reform can substantially influence diminishing the corporate shadow economy within a society. More specifically, our research delves into how economic growth can mitigate the corporate shadow economy, primarily driven by shifts in tax collections within Lithuania. Utilizing quarterly data from 2002 to 2022, we use panel regression and causality analyses as the overall analytical approach. The analyses uncover a complex relationship between various effective taxes and the extent of the shadow economy. Notably, we find that while an increase in the effective income tax rate is associated with a growing shadow economy, an uptick in the effective corporate income tax rate has the opposite effect, reducing its scale. Additionally, a rise in the effective VAT rate is linked to an expanded shadow economy. However, the influence of these effective taxes on imports has limited significance in regulating the scope of the shadow economy, likely due to increased tax evasion incentives. Overall, this study contributes to our understanding of how tax reform can impact the shadow economy and underscores the need for more comprehensive strategies to address this issue.

Received: September, 2023

1st Revision: April, 2024

Accepted: June, 2024

DOI: 10.14254/2071-8330.2024/17-2/15

JEL Classification: H2, H3

Keywords: shadow economy, economic growth, gross domestic product, tax revenue