The countries most affected by the Eurozone debt crisis seem also to be characterised by bad institutions and large shadow economies. This column describes the bad equilibrium in which bad governments offer few and low-quality public services and make people less willing to pay for services. Firms stay underground, public receipts stay low, and governments remain inefficient. In sum, the presence of inept bureaucracy may be strongly associated with the shadow economy.

Can financial sector reform help bring informal firms into the formal sector? This column examines over 22,000 firms from 43 countries. Firms in countries with a credit registry are 20% less likely to evade taxes, and the tax evasion ratio in such countries is 11% lower.

Europe’s highly indebted countries – Portugal, Italy, Ireland, Greece, and Spain – also face the problem of tax evasion. This column analyses how governments can tackle their fiscal deficits while reducing the possibility of forcing activity underground. It suggests that fewer, better paid public workers could complement tax cuts in fighting tax evasion.

Russia’s economic and fiscal successes since adopting a flat tax in 2001 have bred enthusiasm for tax reform amongst casual observers. This column summarises research investigating the flat tax’s effects and suggests that many of the gains came from reduced tax evasion in Russia.