Abstract

The study aims to measure the size of the shadow economy in Palestine during the period 1995-2012 by using multiple regression method. In addition, the study aims to assess the main reasons that affect the size of the shadow economy. By using latest data and multiple regression method, this paper finds that, the size of shadow economy is between (57%-88%) of GDP. The size of shadow economy in Palestine is very high due to the political situation, which are a result of the Israeli occupation since 1967 and the blockade of Gaza strip. The main factors that affect the size of the shadow economy in Palestine is the ownership of businesses, an increase of ownership by 1% to the total employment leads to an increase in the shadow economy size by 0.57%. Another important reason that affects the size of the shadow economy is the tax burden. According to our results, an increase of tax burden by 1% leads to an increase in the shadow economy size by 0.54%. Other factors that affect the size of shadow economy in Palestine like the unemployment rate; growth rate and intensity of regulations are included in our study and have a significant effect. The shadow economy in Palestine plays a negative role that decreases the tax collections and affects the governmental fiscal policies.

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