Analyzing the Effect of Macroeconomic Variables on the Underground Economy with Emphasis on Fiscal Policy Instruments

Due to the increase in economic sanctions in recent years, the government has been encouraged to decentralize the system dependent on oil revenues and replace it with tax revenues. The aim of the research is to investigate the effects of macroeconomic variables on the underground economy with an emphasis on the fiscal policy instruments in Iran in 1973-2021. For this purpose, at first, the value of the underground economy was estimated by the mimic method. The results showed that the average underground economy (proportion of production) is equal to 15.19 percent over 48 years. The results of estimating the model in two formats using the ARDL approach indicate that government size (based on total, current and capital expenditures) has an inverse effect and tax burden (based on total and indirect tax) has a direct effect on the underground economy, but direct tax has no significant effect. Considering the decreasing trend in the government size and the almost increasing trend in the tax burden, it can be said that the decrease in the government size and the increase in the tax burden have been effective on the increasing trend of the relative size of the underground economy. Also, the informal exchange rate and the inflation rate have a direct effect on the underground economy, but in terms of size, the inflation rate is inelastic. Therefore, according to the high elasticity of the underground economy respect to the tax burden, the government should consider a suitable combination of tax components according to their elasticity and be able to control and reduce the underground economy to some extent by defining the duties of the government, reducing the current expenditures and allocating more capital expenditures.