Analysis On The Effect Of China 's Underground Economy On The Effectiveness Of Tax Policy

Underground economy is called shadow economy, unconventional economy or black economy, raised by Giorglo Fua, an Italian economist in 1977. So far, it has become an independent research field in economic research. Many referential research achievements have been made to facilitate us to understand economic system and economic operation mode. In broad sense, underground economy refers to economic production activities that the authority has no statistics about but does contribution to GDP, including underground economy, illegal economy and unconventional economy. In narrow sense, underground economy refers to economic activities that avoid taxes and charges intentionally and unintentionally owing to economic reasons. According to estimated result of foreign and domestic scholars, underground economy accounts for about 20% of GDP in China. Such big scale may exert impact on national macroeconomic operation and government economic regulation policies and measures. However, from the point view of dialectic, underground economy provide the flexibility of reserve for conventional economy. Underground economy bears part of burdens in implementing deflation policy to restrain demand and assumes buffering function as economic lubricant in the situation of increasingly inflexible formal economy. Generally speaking, the impact of underground economy on conventional economy is vague and uncertain. Above all, mutual stimulation and check and balance between underground economy and tax policy make logic defect to exist in any unilateral researches. Therefore, many contents are worthy of exploring on underground economy.Underground economy is hidden and its research means are single, while DSGE model provides new tools for research and exploration of economic problems. Based on Dynamic Stochastic General Equilibrium theoretical frame, this paper establishes DSGE model including underground economic sector. It mainly considers the impact of tax rate policy and technology and analyzes the correlation of underground economy and partial fiscal policy. Research result shows that tax rate reduction contributes to controlling the scale of underground economy and enhancing steady level of economy, while tax rate increasing will intensify economic problems further and makes steady state of economy degrade to a low level. The existence of underground economy has its objective necessity. Only strengthening regulation and increasing penalty will not produce long-term and effective result. On the contrary, it may cause invisible economy to shift into deeper underground and increases regulation difficulties and coast. In the view of government, tax loss caused by underground economy will affect government’s performance of expenditure function, but in a fully competitive market, so-called underground economic tax loss may not exist, so government should put the emphasis on monopolistic industry. Based on the above analysis, the paper suggests reducing tax rate properly, expanding tax base, strengthening regulation, enhancing quality of labors, establishing perfect labor security system and social security system and building freer and more open market.