An Anti-Austerity Policy Recipe Against Debt Accumulation in the Presence of Hidden Economy

Abstract

Contrary to what the literature on the linkage between debt accumulation and hidden economy suggests, this paper advocates that the two relationships, tax-hidden economy size and inflation-hidden economy size, have to be inverse because it is the relative, not the absolute hidden economy size that matters, and it is this that should be the yardstick for empirical work on the subject. It is also this that should be the yardstick for policymaking against debt accumulation by following the anti-austerity policy recipe that debt manipulation should be relying more on money than on taxation, that as soon as more money facilitates hidden activities, tax design should be counteracting this trend too, and that the Laffer curve should be peaking at an average tax rate which is less than one. This rule derives as a matter of preserving such official-cum-hidden economy technical-cum-allocative efficiency over the course of the business cycle that keeps the overall economy always in general equilibrium.