Black Economy Crackdowns Fall into a Grey Zone ; Greater Attention to Incentives in the Tax and Benefit Systems Could Be Fruitful
Coyle, Diane, The Independent (London, England)
CHANCELLORS DO like to pledge crackdowns on the shadow or "black" economy. Buried amongst the many supposedly radical measures Gordon Brown announced last night was tougher action against benefit fraud and tax evasion.
But is getting tough the best way to shrink the shadow economy? That depends on why it has grown in the first place.
All the signs are that around the globe shadow economies are growing faster than official economic activity, increasing relative to total national output.
A survey article in the latest issue of the Journal of Economic Literature* presents estimates for a wide range of countries, factoring in shadow- economy activities. These activities extend from trade in stolen goods and prostitution, through to benefit fraud and underpayment of income tax.
Four countries turn out to have much smaller shadow economies than the rest of the world. They are Austria, Japan, Switzerland and the US. At the other extreme, with the biggest shadow economies, are two of the four African countries included in the study, Nigeria and Egypt, closely trailed by Guatemala and Thailand. Most Organisation for Economic Co-operation and Development (OECD) countries have shadow economies accounting for between 13 per cent and 30 per cent of GDP. The UK is near the bottom of this range, along with Germany, the Netherlands and France, while Italy and Greece are near the top.
The authors also looked at the expansion of shadow economies in a handful of countries and found substantial growth in each between 1960 and 1995. Germany's shadow economy expanded from 2 per cent to 13.2 per cent of GDP, America's from 3.5 per cent to 9.5 per cent.
To an economist this immediately suggests that it is becoming relatively less attractive for individuals and businesses to operate in the formal economy. One obvious reason for this might be the trend increase in the tax burden. This has risen substantially in all OECD countries since 1960. There is also a clear correlation between having a low tax burden, like Japan, Switzerland or the US, and having a small shadow economy. After all, the lower the taxes, the less there is to escape. In addition, the biggest shadow economy growth seems to have occurred in countries, like the Scandinavian ones, where the public sector has expanded substantially.
Yet the research suggests that it is not actually the size of the tax burden that matters so much as its onerousness, more broadly defined. A heavy tax burden tends to go hand in hand with burdensome government regulation. It is extensive regulations, actively enforced, which seem at least as likely as high taxes, to boost shadow economies.
The authors conclude that governments wanting to shrink shadow economies should put more …
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Publication information: Article title: Black Economy Crackdowns Fall into a Grey Zone ; Greater Attention to Incentives in the Tax and Benefit Systems Could Be Fruitful. Contributors: Coyle, Diane - Author. Newspaper title: The Independent (London, England). Publication date: May 9, 2000. Page number: 18. © 2009 The Independent - London. Provided by ProQuest LLC. All Rights Reserved.