Estimating Shadow Economy and Tax Evasion by Considering the Variables of Government Financial Discipline and Behavioral Factors in Iran’s Economy

Low tax incomes and the large size of the government in Iran lead into budget deficit, which increases the inflation rate. It also causes economic instability and fluctuations in inflation, leading to tax non-compliance and the transfer of people to the informal economy. Therefore, considering the variables of financial discipline and behavioral factors, this research examines the effect of these variables on the size of the shadow economy and tax evasion caused by it in Iran during the period of 1967-2015. For this purpose, first, we select eight models, and the final model is selected with Multiple Indicators and Multiple Causes (MIMIC) approach among them. Then, using the side information and calibration of the time series, the relative and absolute sizes of the shadow economy and the tax evasion resulting from it are calculated. The results indicate that the tax morale and tax burden on imports and unemployment rates are the main causes involved in creation of shadow economy. Moreover, the results indicate that the effect of behavioral factors on increasing the size of the shadow economy and tax evasion resulting from it is more than that of variables of financial discipline in Iran.