The Hidden Economy: Economic Models of Participation and Deterrence.

The study of the hidden economy is considered to be difficult, as those individuals who engage in the hidden economic activity do not wish to be identified. Thus, as suggested by academics, the study of hidden economy is a passion to know the unknown. The rise in the hidden economy suggests an increase in the burden on the individuals and firms imposed by the government. Tax evasion constitutes a large part of the hidden economy. A rational person will choose to evade taxes based on a rational calculus between the cost and benefit involved with hiding their income and evading taxes. This dissertation focuses on studying the behavior of an individual or firms in maximizing the amount of money hidden through an economic approach. This work aims to provide a theoretical approach towards deterring the hidden economic activity. We concluded that an increase in the fine rate, length of the sentence or probability of detecting the crime will only be able to deter the activity to an extent due to the presence of an upper bound. There is a gap in the existing law to incorporate care as a determinant of penalty for engaging in the hidden economic activity. Further, the government should also aim at introducing a provisional statutory maximum penalty with an appeal to the higher courts. In this manner, the government can deter hidden economic activity to an extent with some certainty and effort