A fuzzy logic approach to modeling the underground economy in Taiwan

The size of the ‘underground economy’ (UE) is valuable information in the formulation of macroeconomic and fiscal policy. This study applies fuzzy set theory and fuzzy logic to model Taiwan's UE over the period from 1960 to 2003. Two major factors affecting the size of the UE, the effective tax rate and the degree of government regulation, are used. The size of Taiwan's UE is scaled and compared with those of other models. Although our approach yields different estimates, similar patterns and leading are exhibited throughout the period. The advantage of applying fuzzy logic is twofold. First, it can avoid the complex calculations in conventional econometric models. Second, fuzzy rules with linguistic terms are easy for human to understand.