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This paper studies the symmetrical relation between the underground economy and taxes in Iran using the most appropriate method for measuring this relationship applying the error-correction model.
According to the results directe taxes have much more effect on the underground economy in the long-run and the indirect taxes are the more effective in the short-run.
Moreover the underground economy shows a symmetric response to the direct tax changes but not to the indirect tax changes.
The symmetric reaction of the underground economy to the changes of direct tax in Iran implies that taxpayers show symmetrical tendency to tax evasion when direct tax increases and enter to the formal economy when the direct tax decreases.