The underground economy in Malta

Abstract

The primary motivation of this analysis stems from the policy issues which are raised by a substantial unrecorded economic activity. The first of these is the potential bias in measures of macro economic performance notably the underestimation of gross national product and aggregate employment. In addition there is the direct loss of tax revenue. Although it is extremely difficult to arrive at any precise and reliable estimate of the underground economy, this dissertation adopts a systematic approach by attempting to provide a general view of the subject from which only the tax evasion and concealed employment components are dealt in certain detail. The empirical strategy used to investigate these issues is inherently limited by the difficulty of developing direct evidence about intrinsically undisclosed activity and requires strong assumptions. Nevertheless, the study attempts to formalise the impact of the phenomenon on the Maltese economy more rigorously and to provide a useful insight in this area of yet unexplored activity.