Informality and Taxation: Evidence from Seven Latin American Countries

This study examines the impact of the shadow economy on taxation in seven Latin American countries between 1993 and 2018. The technique is built using a MIMIC model and a bootstrap panel Granger causality approach. The results show that the variables are related causally, with the shadow economy having a detrimental impact on tax revenues. Governments are advised to embark on labor market and institutional reforms, reduce barriers to firm entry, provide a reliable and sufficient regulatory environment, and provide employee social protection as ways to reduce the informal economy.