Estimating the Size and Determinants of Hidden Income and Tax Evasion in Malaysia

This paper uses the monetary demand approach of Tanzi (1983) to develop plausible estimates of the size of the hidden income and extent of tax evasion in Malaysia for the period 1971 to 1994. Key influences are income tax rates, the rate of interest, rate of inflation, and structural change in the financial market. Estimates of the size of the hidden economy range from a high of 8.7 per cent of GNP in 1980 to a low of 3.7 per cent in 1993, with tax evasion accounting for an average of just over 20 per cent of actual income tax collections over the period.