Estimating the Underground Economy and Tax Evasion in Ghana

This paper has attempted to provide estimates of the size of the underground economy and estimated tax evasion in Ghana from 1990 to 2010 which have received little consideration. The Stock-Watson DOLS estimate for currency demand was employed. Our estimates suggest that underground economy is quite large accounting for about 48% of the official economy on the average. These results are consistent with the stylized fact about the Ghanaian economy, in particular the large number of persons employed in small business and trading versus the number of tax returns filed on an annual basis and also claiming to have incomes way below taxable levels. The estimated evaded tax ranges from 4% to about 14% of the official economy and higher budgetary supports and loans contracted in a year. The implication is that any success made in reducing such leakages may have positive effect on fiscal and monetary policy