Shadow economy and tax evasion are two inseparable phenomena. The existence of the former suggests the present of the latter and vice versa. The presence of shadow economy reduces the tax base and thereby eventually reduces government tax revenue. Since the activity of the shadow economy is excluded from the official gross domestic product (GDP) statistics, thus, official GDP statistics will provide wrong indicators for macroeconomic policy decisions. On the other hand, tax evasion is a growing concern to the government as the tax revenue loss has serious economic consequences. By evading taxes the government is deprived from providing adequate financing for public services, infrastructure, human capital development, best health care services and other facilities that would benefit the society. Furthermore, the loss of tax revenue may result in slow economic growth, the proper functioning of the government as the ability to finance its basic expenses is threatened. Thus, fighting shadow economy and tax evasion should be an important agenda for any government. In this study, we propose to estimate the size of the shadow economy and tax evasion for 10 ASEAN economies and further to determine factors affecting both shadow economy and tax evasion.
