The informal economy share rises after reaching a high GDP... Norway has a bigger shadow economy than the US

Nonlinearity Between the Shadow Economy and Level of Development. Dong Frank Wu, Friedrich Schneider. IMF Working Paper No. 19/48, Mar 2019. https://www.imf.org/en/Publications/WP/Issues/2019/03/01/Nonlinearity-Between-the-Shadow-Economy-and-Level-of-Development-46618

Summary: This paper is the first attempt to directly explore the long-run nonlinear relationship between the shadow economy and level of development. Using a dataset of 158 countries over the period from 1996 to 2015, our results reveal a robust U-shaped relationship between the shadow economy size and GDP per capita. Our results imply that the shadow economy tends to increase when economic development surpasses a given threshold or at least does not disappear. Our findings suggest that special attention should be given to the country’s level of development when designing policies to tackle issues related to the shadow economy.

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The paper also seeks to identify the potential factors which boost GDP per capita. Consistent with the growth literature, we find that educational attainment plays a vital role in improving GDP per capita, especially a college degree or above. This result helps shed some light on a possible mechanism of a U-shaped pattern at the micro level. From the individual perspective, people work to make themselves better off. When the level of development is low, education helps build up labor productivity and skilled workers with college education or above choose to stay in the formal sector to enjoy benefits from high productivity position and social security net. When the economy advances to a new level at which income of skilled workers becomes high enough and one household member can easily cover the whole family’s daily expenses, demand for informal work is likely to increase due to work flexibility or other desirable perks. Hence the size of shadow economy reverses its downtrend.


Check also the paper that found that taxpayers’ attitudes toward evasion are not predictive of behavior & that tax compliance is not related to trust in government or one’s fellow citizens; Danes are more likely to evade tax than Italians; at the same time, Danes are less tolerant of tax evasion by others:

Willing to Evade: An Experimental Study of Italy and Denmark. Alice Guerra and Brooke Harrington. Copenhagen  Business  School, Department  of  Business  and  Politics. https://www.bipartisanalliance.com/2018/09/found-that-taxpayers-attitudes-toward.html