The role of tax competitiveness and neutrality in shaping the size of the shadow economy: cross-country empirical evidence

This empirical paper examines the relationship between the tax competitiveness and neutrality of a country's tax system and the size of shadow economies across countries. Utilizing panel data from 38 OECD countries spanning the years 2014 to 2017 and a two-way fixed effects two-stage least squares estimation, the findings reveal that heightened tax competition is associated with a smaller shadow economy and this effect is both statistically significant and economically important.