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: 133


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.