ABSTRACT
Tax policy is the most complex area of economic policy, because each tax change has so many ramifications. The underground economy is just one of many concerns that affect tax policy. The existence of an underground economy can have a number of significant impacts on conventional views of what is optimal tax policy. Public policy may be influenced toward reducing tax rates if concerns about the underground economy loom large. The actual economic argument for the superiority of a consumption tax is that it avoids the taxation of the income earned from the return to saving. It is often suggested that a value added tax, because it is a multi-stage tax, is less likely to be fully evaded than a retail sales tax.
