Discussion Paper

No. 2019-67 | November 20, 2019
Does the tax undermine the effect of remittances on shadow economy?


There are considerable studies regarding the contribution of international migrants’ remittances to economic growth while there is a lack of studies which investigate the effect of remittances on shadow economy. The authors explore empirically the effect of remittances and its interaction effect with tax on shadow economy by using panel data covering the period 2004–2015 and applying the GMM method for 141 countries. Their empirical model, in which a remittance-recipient government, operating in tax environment of some regimes (imposition of different levels and kinds of taxes), predicts a negative effect of remittances on shadow economy, is mitigated by a higher tax regime. In other words, the paper argues that a well-established negative correlation between remittances and shadow economy has been weakened by tax rule. The study contributes to the current literature on public policy that gives importance to know the causes of shadow economy and boost remittances effect. The authors´ baseline results are robust to various computations of macroeconomics variables, institutions variables and freedom variables.

Data Set

JEL Classification:

O17, H24, H71, F24


  • Downloads: 220


Cite As

Friedrich Schneider, Shabeer Khan, Baharom Abdul Hamid, and Abidullah Khan (2019). Does the tax undermine the effect of remittances on shadow economy? Economics Discussion Papers, No 2019-67, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2019-67

Comments and Questions

Anonymous - Referee report 1
December 11, 2019 - 07:53

This paper has explored the linkages of remittances with shadow economy by incorporating the role of taxes in 141 countries. The flow of remittances plays a vital role for the economic growth but at the same time it may inflate the size of shadow economy. The tax evasion is one ...[more]

... of the key factors in expanding the size of shadow economy. So the policy maker must consider these linkages before devising an effective tax policy. Overall, this paper has a valid contribution both in literature and policy. The subject matter is very well defined throughout the manuscript but it would have been much better if the authors would further highlight the problem statement in the introduction section. The literature and theory part in its current state is enough for the readers to grasp the understanding. An appropriate methodology has been opted, it would be better if the authors would provide the list of the countries selected for this research. There are some minor spelling and grammar mistakes in the manuscript; it is advised to carefully proofread the article before final submission. I would recommend the publication of this paper.

Anonymous - Referee report 2
January 21, 2020 - 10:14

1- No need to include the first para in the introduction, I think the information’s already discussed in the later exercises.

2- The study found a significant number of careless errors like spelling mistakes (for instance connexion page2 first para,) inappropriate words. For instance, avoid words like he, ...[more]

... him. Boost up, connect Correct the entire document.

3- The study link remittances with shadow economy using the Dutch diseases phenomena. However, it doesn’t always happen in the remittances recipient countries.

4- In a literature review, be specific to the objective of the study, avoid the irrelevant details. If there are limited numbers of studies on the topic, the study requires to do an in-depth analysis of the available studies. It would be pertinent to construct a narrative that why the studies are important, and briefly explain in what ways the present study contributes to the empirical literature.

5- What are the channels of remittances through which shadow economy are interlinked? The argument partially discussed in the introduction as well in the theoretical underpinning section but needs a very strong narrative.

6- Include tax burden in equation 1, and also use same variable name (Equ.2) as reported earlier.

7- The study used GMM estimation to control for endogenity without sorting out the endogenous and exogenous variables. It seems that all variables in the model are taken as endogenous variable instrumenting by their respective lags. I would recommend to run an endogenity Hausam- Wu test before adjusting for endogenity problem. Similarly, how’s the interaction term deals in the instrumentation? Please, send the do file of the analysis.

8- The considerable volume of remittances is transferred through informal channels. I think the cost of remitting playing a role somewhere between remittances and shadow economy. The negative relationship between formal remittances and shadow economy can be due to regulations and the costs of remitting. Moreover, cost of remitting and regulation can be used as instrument in equation 1. Read for instance Junaid Ahmed and Inmaculada Martínez-Zarzoso (2016). Do Transfer Costs Matter for Foreign Remittances? A Gravity Model Approach. Economics: The Open-Access, Open-Assessment E-Journal, 10 (2016-4): 1–36. http://dx.doi.org/10.5018/economics-ejournal.ja.2016-4

9- Provide the descriptive statistics of the variables used in the study.

10- The study provided plenty of results, however its pertinent to explain the results in the discussion section to previous estimates and economics theory. Furthermore, what relevant policy would be suggested given the outcome of the study.