The Effect of Tax Evasion on Consumption in OECD Countries

Abstract

This paper studies the effect of tax evasion on consumption for a panel of OECD countries using annual data from 2003 to 2021. Our model includes the consumption percentage of nominal GDP as the dependent variable, with inflation, nominal GDP, interest rates, unemployment and tax evasion as explanatory variables. We use the shadow economy (as a percent of GDP) as a proxy for tax evasion. Results from our generalised method of moments model indicate that tax evasion is positively associated with consumption, likely because tax evasion increases disposable income. We discuss policy implications.