Tax Evasion and Fiscal Sustainability: A Panel Assessment Using Informal-Economy Proxies

Abstract

This study examines the relationship between informal economic activity and fiscal vulnerability, using the size of the informal economy as an empirical proxy for the tax-compliance problem associated with tax evasion. The analysis combines the World Bank Informal Economy Database, the World Bank Worldwide Governance Indicators (WGI) 2025 revision, and macroeconomic fiscal data supplied in the authors' existing workbook. The verified estimation sample comprises seven countries: Brazil, Germany, Ghana, Kenya, Nigeria, the United Kingdom, and the United States, observed annually from 2010 to 2020, yielding 77 country-year observations. The primary outcome is public debt-to-GDP, interpreted as fiscal vulnerability rather than as a positively oriented sustainability index. The primary explanatory variable is the World Bank Dynamic General Equilibrium (DGE) estimate of informal output as a percentage of official GDP; the Multiple Indicators Multiple Causes (MIMIC) measure is used for robustness. A country and year-fixed-effects model with country-clustered standard errors produced a negative but statistically non-significant association between DGE informality and debt-to-GDP (β = −6.271, p = .104). The random-intercept model produced a more negative estimate (β = −2.833, p < .001), while the Hausman test did not reject the random-effects specification at the 5% level (χ² = 6.804, p = .147). The study findings submit that the relationship between informality and fiscal outcomes is sensitive to model specification and measurement. Policy implications should lay emphasis on revenue administration, institutional quality and transparent fiscal governance without assuming that reducing informality mechanically reduces public debt. (World Bank, 2024; World Bank, 2026; International Monetary Fund [IMF], 2026)