Estimating the Total Tax Gap Based on the Size of the Shadow Economy

Abstract

The scientific problem of estimating the size of the tax gap is the interpretation of the tax gap results. Many interpretations focus on a single number, ignoring the context of the methodology and data source used or the evolution of GDP. This paper examines the variability of tax gap estimates and the high dependence of the output on the chosen methodology, keeping the assessment of the shadow economy as the first step in estimating the tax gap. The study collects and deploys all the known methods used to estimate the total tax gap and identifies the spread of estimation using the case study of the Czech Republic’s gap for the period of 1993 – 2012 evaluation. The paper analyzes data from official sources such as the OECD, the EU, the CSO, the Ministry of Finance and Tax Administration reports. The first part of the analysis estimates the size of the shadow economy using the most common estimation methods. Due to the variability of the methods used, the results show the range of different values with a surprisingly high variability between 2.2 per cent and 19.5 per cent for the year 2012. Based on the previous results of the shadow economy, the amount of total tax gap of the Czech Republic for the period 1993–2012 is determined. The range of the values is wide, based on the method of estimating the size of the shadow economy.  The results are presented in the context of other previously realized estimates and compared with the results of relevant studies. The most important finding of the study is the confirmation of the wide range of the tax gap results, which theoretically eliminates any possible simplified approach to the interpretation of the size of the tax gap.