Impact of shadow economy and corruption on tax efficiency

Shadow economy exists in any economy, having a substantial impact on legal economy. It can be conducted separately, but most often it brings about significant consequences to the economic order. It is, therefore, very important to identify the relationships among factors fostering shadow economy. The universal roots of shadow economy are generally recognised, but there is still a considerable area left to be explored. Even though much attention is paid to taxes as the main cause of shadow economy, few investigations have been dedicated to tax effectiveness in terms of social budget expenditure versus total budget revenue. The aim of the study was to investigate the dependence between social budget spending and shadow economy performance. The MIMIC approach was employed to assess the level of shadow economy in selected OECD countries. Furthermore, the correlation between overall tax burdens and shadow economy was estimated. Moreover, the correlation between social spending and tax burdens was assessed. The correlation value between overall social budget expenditure and shadow economy was calculated to be high, at – 0.6682. This means quite a strong negative correlation. The higher level of social spending reduces shadow economy performance. However, the correlation level between overall tax burdens and shadow economy is positive, reaching the level of 0.4458. There is a very strong positive correlation between overall tax burdens and social budget spending, estimated at 0.8984. Based upon the results, it can be concluded that close attention should be paid to tax effectiveness and its relationship with shadow economy performance.