What effect is an increase in income tax rates likely to have on the underground economy? Why?

Underground economy refers to the illegal trade of goods and services because it does not comply with the government’s policy of reporting necessary requirements. An example of this is smuggling of goods and prostitution. If there is an increase in the income tax rates, the underground economy will continue to grow and tax evasion may be rampant. It is because some people would avoid in their duty of paying right amount of taxes and prefer to earn more money.