On the asymmetric relationship between the size of the underground economy and the change in effective tax rate in Taiwan

► The asymmetric response of the underground economy to an effective tax rate change is investigated. ► The size of the underground economy in Taiwan from 1962 to 2003 is estimated. ► An increase in the effective tax rate has a greater effect than a decrease on the underground economy. ► The effect on the underground economy is stronger for of direct than for indirect effective tax rates.