Document Type : Research Paper

Authors

• Maliheh Khajavi ¹
• Ebrahim Rezaei ²
• Hassan Khodavasi ²

¹ M.A. in Economics

² Assistant Professor, Economics and Management Faculty, Urmia University

Abstract

Underground economy has various names in economics literature like, black
economy, unregulated economy, and unreported economy and so on. Since there is no exact
definition for the Underground economy, in this study we try to measure it indirectly by
using the observable variables and build a model to explain it. Then we try to estimate the
model by Maximum likelihood and Instrumental Variable methods.
The aim of this paper is to estimate the size of the Underground economy in Iran by
using the unobservable variable model (Multiple indicator and multiple causes). Our
estimates show that the share of the Underground economy in Iran was about 17.21 percent
of the Gross Domestic Product (GDP) during 1350-1386. Our result also indicates that the
tax Gap was about 22 percent of the total tax revenue for the above-mentioned period. For a
number of reasons, which will be discussed later in the main text, the size of the
Underground economy and tax gap is increasing for the foreseeable future in the economy
of Iran.

Keywords

• words: Underground Economy
• Effective Tax Rates
• Tax-Gap
• MIMIC Approach
• Tax Evasion