True or False: Higher income tax levels and increased government regulations tend to increase the underground economy.

The statement is considered true because higher income tax levels and increased government regulations can create incentives for individuals and businesses to operate outside the formal economy. When tax burdens are high, people may be motivated to avoid these taxes through illicit means, thus contributing to the growth of the underground economy. Additionally, stringent regulations can lead businesses to seek ways to bypass compliance, often resulting in unreported income or unregistered activities. This tendency reflects a behavior where individuals or entities prioritize evading taxes and regulatory frameworks, ultimately expanding the underground economy.

On the other hand, factors like a robust economy, effective regulatory environments that streamlining business operations, and consumer trust in formal markets could reduce the size of the underground economy. However, the overarching trend observed in many contexts is that as taxation and regulation increase, so does the potential for underground economic activity. Consequently, the correct answer aligns with this understanding of the relationship between tax levels, government regulations, and the underground economy.