Tax rate hikes boost shadow economy.

Mumbai: The RBI has made a case for lower taxes in the battle against the shadow economy. Quoting reports that place the size of global shadow or parallel economy, at $10 trillion, the RBI said that this economy renders official statistics unreliable and severely impacts policy formulations by governments. "Besides, the loss of tax revenues may force governments to hike tax rates, which in turn may further encourage greater activity in the shadow economy," the RBI said in its Financial Stability Report on Thursday.Speaking about the relation between income and black money, the RBI in its FSR on Thursday said, "As per some analyses, in the US a 1-percentage-point increase in personal income tax rates, other things being equal, tends to increase the size of the shadow economy by 1.4 percentage points." Similarly, a 1-point increase in a regulation index (ranging from 1 to 5) corresponds to a 10% increase in the shadow economy, the central bank added.