The country in Europe with the biggest untaxed, or “shadow,” economy as a proportion of GDP is Greece. Next is (gulp) Italy. Then Portugal and Spain. On the chart below, in fact, the bars look unsettlingly like dominoes.
There is more information and a good chart here. There is this too:
Massive tax evasion helps produce large public-sector deficits. Let’s make some simple back-of-the-envelope calculations: if the shadow economy is adding 25 percent to GDP, with income going untaxed, and if the average tax rate on such income is a conservative 20 percent, recovering such tax revenues would imply an additional 5 percent of GDP in tax revenues, which would bring down the Italian 2009 deficit to zero. As deficits cumulate into debt, prolonged tax evasion could explain – by itself – the whole of the Italian public debt, now projected at 118.4 percent of GDP.
How much “prolonged tax evasion” is there in other western democracies, including the US?
Wonder what including illegal drug revenues does to US GDP?
“Massive” tax evasion does not large public-sector deficits. Public sector spending does.
There is no reason to believe that if the informal economy was fully taxed it would remain as large and as profitable as it is.
There is no reason to believe that with new revenue from this sector the government would chose a zero deficit rather than ratcheting up government spending and borrowing.
I have a strong suspicion that tax evasion in the construction sector is (or was) the single largest component of the shadow economy in Spain, and it’s tolerated by the government and the public because “everybody does it”. For a while it seemed OK to leave alone a sector that was the motor of the economic boom in Spain. It is often said that low interest rates in the Eurozone are in part responsible for inflating the construction bubble that took place in Spain. However I’ve never heard that public tolerance of tax evasion had anything to do with it. But if the government had realized in time that there was a housing bubble and wanted to do something about it, then being tougher in the collection of taxes in the construction sector would have been a good way to cool down the economy and at the same time solve the deficit problem without the need to pass any new laws or raise taxes. But of course that would have been too much to expect from the Spanish authorities…
And besides, when the governments were spending deficits for YEARS, did they say “this plan is based on 100% tax collection”?
That is not entirely implausible because here in the USA, our budgets are based on collection of the AMT…until it gets “patched” EVERY SINGLE YEAR.
So, government stupidity may be a plausible explanation.
It’s worth noting that there are countries with high taxes AND high collection rates; these countries aren’t in trouble. Furthermore, it’s possible that tax rates might be lower if everyone (or nearly everyone) paid.
Britain probably won’t win the prize for being Europe’s most flagrant
shadow economy but during my years there I found a clear distinction
between people who accepted checks and credit cards and those
who would take only cash, with the intent of not paying tax. My view
of this matter is that if one’s objection is to high tax rates, one
works for the election of Members of Parliament who are in a position
to bring them down. Tax evasion just corrodes the society.
As in America, Inland Revenue took to stationing agents in and around
establishments to verify that there was a correlation between volume
of business and taxes paid.
‘recovering such tax revenues would imply an additional 5 percent of GDP in tax revenues’
Sure. But what makes anyone think the shadow economy would continue with the same vigor once taxed? On one extreme you have a model where this is all business that would have been transacted anyway, and the agents are just getting large extra profits by avoiding taxation. On the other you assume that the primary reason for this business to be transacted in the shadows is that once taxes are figured in, there is no longer any way to make the transaction(s) work out for everyone involved. Presumably the truth is somewhere in the middle, but treating the whole situation as inelastic is clearly kind of stupid.
Anyway, I agree with taxman: there is no reason to think that the extra revenue wouldn’t just be spent, with debt levels the same as before. In that sense, promotion of a shadow economy is just a pragmatist’s version of ‘starve the beast’…
And what about the untaxed home production sector???!!!???
All over the world people are producing value in their homes: cooking meals, caring for children, mowing lawns, doing laundry, etc. This entire sector is untaxed! Stay-at-home moms are the worst of all. Clearly all our chronic problems with government debt would be solved if not for these innocent looking tax evaders!!!!
(Yes, I know theories of optimal taxation show it would be more economically efficient if we could tax all income equally, including home production. But to think that this would somehow make governments better behaved is completely silly.)
‘Yet commentors here happily defend corruption and illegality!’
Uh, I’ll take on illegal. Just because something is “illegal” doesn’t make it wrong and mean we all have to get behind it and cheer.
Example: the “legal” yet stupid, costly, completely ineffective, morally bankrupt, and infantilizing “War on Drugs”.
(The only drugs I use are ibuprofen and caffeine.)
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