The Consequences of a Changing Shadow Economy for the "Official" Economy: Some Empirical Results for Austria Friedrich Schneider, Markus F. Hofreither, and Reinhard Neck, Linz, Vienna, Austria *) 1. Introduction During the last few years, growing concern about the phenomenon of the shadow (or hidden) economy has arisen; as a consequence, the shadow economy has re- ceived increasing attention by the public, politicians, and social scientists. 1 For industrial countries, there are at least two reasons why politicians have become concerned about the growth and size of the shadow economy: (1) If an increase in the size of the shadow economy is mainly caused by a rising tax burden, any increase in tax rates may lead to a further shift from official to inofficial activities and, hence, to a further decrease in tax revenues. (2) If - due to the existence of the shadow economy - some individuals have a second source of income and spend at least part of this income in the "official" economy, any change in the size of the shadow economy directly affects the development of the official economy. The aforementioned concern is reflected in many attempts by economists to measure the size of the shadow economy, and a considerable number of studies have been undertaken which yield quantitative results on the size and development of the shadow economy in the OEeD-countries. To measure the shadow economy, the currency-demand and the model approach are the two methods most often used. 2 The results of both approaches indicate that for Austria, Denmark, Norway, .) We are indebted to the participants of the Vienna conference on the political economy of progressive taxation, and particularly to D. Bos, J. Brunner and J. Falkinger for helpful discussions. Remaining errors and shortcomings are our responsibility. 1 A useful working definition in most studies of the shadow economy is: the shadow economy is defined by all those economic activities which contribute to value-added and should be included in national income according to national income accounting conventions but are at present not registered by the national measurement agencies. Compare, e.g., Frey and Pom- merehne (1984) and Kirchgiissner (1984). 2 These two methods are the most commonly used and are explained in various surveys, which D. Bos and B. Felderer (Eds.) The Political Economy of Progressive Taxation © Springer-Verlag Berl in Heidelberg 19B9