estate values could more than compensate for the loss of stamp duties due to a substantial reduction in rates. Only in those scenarios that are shaded would the black economy tax effect be less than total stamp tax collections.

Within this broad range of scenarios, it is possible to assess which parameter values are the more plausible by relating these computations to other estimates of the percentage of GDP in the “black” economy. One can work backward through the basic equations to compute the total value of black GDP driven by underdeclaration in real estate. The share of stamp duties in GDP is roughly 0.5 percent.<sup>39</sup> If the velocity of black money is 5, underdeclaration is 40 percent, and the stamp tax rate is 10 percent<sup>40</sup> , then the implied black economy share of GDP from real estate is about 17 percent. Recent estimates show about 23 percent of GDP is in the black economy in India.<sup>41</sup> Earlier work by Acharya et al. (1986) on the black economy suggests a figure of about 18 to 21 percent for 1980-1981.<sup>42</sup> Together these figures strongly suggest that the parameter values we have chosen are not outside the bounds of plausibility.

# **E. Stamp Duty Rates and Revenue Performance: Evidence for a Link Between Undervaluation and Stamp Duty Rates**

A critical assumption underlying the above scenarios is that underdeclaration of property values is sensitive to the stamp duty rate; that is, if duty rates are lowered, then there will be less tendency to underdeclare property transaction values to evade high stamp duties, and accordingly the flow of money into the black economy will decline. This is commonly thought to be the case in India.

We sought further empirical support for this intuitively plausible assumption by analyzing the behavior of stamp duty revenues in response to changes in tax rates.<sup>43</sup> This indirect method was chosen because it is difficult to observe underdeclaration directly given that this is an illegal activity. If property undervaluation is common and sensitive to tax rates, we would expect it to affect the relationship between changes in tax rates and revenues over time. It should be emphasized that we are not testing the hypothesis that there is a Laffer curve effect for stamp duties **collections** : if a Laffer curve effect were in evidence for stamp duties, then underdeclaration would decline sufficiently to generate increased revenues from stamp duties themselves. Here we are only looking for evidence that **underdeclaration** declines when stamp duty rates decline from the levels currently in place in India. As the simulations above show, plausible parameter values suggest that, even if there is a reduction in stamp duty revenues when rates decline, additional revenues from other taxes may be generated by staunching the flow of money to the black economy.

> 39 See Indian Public Finance Statistics 2001-2002, Table 1.2

> 40 The weighted average stamp tax rate for the sixteen major states is 9.7 percent as of 2001.

> 41 See Friedrich Schneider (2002), “Size and Measurement of the Informal Economy in 110 Countries Around the World”, paper presented at the Workshop of the Australian Tax Centre, ANU, Canberra, Australia, July 17, 2002.

> 42  See Shankar Acharya et al. (1986), _Aspects of the Black Economy in India_ , National Institute of Public Finance and Policy (New Delhi, India).

> 43 For this purpose, we used a time series of non-judicial stamp tax revenues in selected States kindly provided by Mr. Tapas Sen of the NIPFP.

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