Trying to glimpse the ‘grey economy’
Charles A.E. Goodhart, Jonathan Ashworth 08 October 2014
Despite the growth of online and card payments, the ratio of currency to GDP in the UK has been rising. This column argues that rapid growth in the grey economy has been a key cause. The authors estimate that the grey economy in the UK could have expanded by around 3% of UK GDP since the beginning of the Global Crisis.
It is a remarkable fact that the ratio of currency to GDP in the UK has been rising, despite the greater use of card and online payments (see Figure 1). The currency-to-GDP ratio now stands at 16.1%, compared to 13.3% in Q4 2007. Currency in circulation per adult person is now equal to around £1,300 in the UK. In some other equivalent cases – e.g. holdings of US dollars, euros, and Swiss francs – this might be because more currency is being hoarded abroad, but this is not likely to be the case for the UK. So what is fuelling this rise in currency usage, if not the grey economy?
Europe's nations and regions Frontiers of economic research Global crisis
global crisis, underground economy, shadow economy, hidden economy, grey economy, black economy, measurement, Currency, UK, tax evasion, GDP, GDP measurement, national accounts
Tax evasion and austerity-plan failure
Francesco Pappadà, Yanos Zylberberg 03 February 2014
Greece’s austerity package included an unprecedented increase in the VAT rate, but the resulting increase in revenue was much lower than expected. This column links this disappointing result to the ‘transparency response’ of firms to higher tax rates. In countries like Greece with poor tax monitoring, firms face a tradeoff when deciding whether to declare their activity. Transparency is a necessary condition for accessing external finance, but it also means having to pay tax. Improving credit conditions for small and medium-size Greek firms might shift this tradeoff in favour of transparency.
Austerity plans in southern European countries (Greece, Portugal, Spain, and Italy) have so far yielded mixed results (Salto 2013). On the one hand, the primary budget balances of these countries have improved, and their risk premiums are now stabilised at a much lower level than during the crisis peak.
Financial markets Taxation
VAT, transparency, tax evasion, Greece, credit, austerity, European sovereign debt crisis
Tax incidence in the presence of tax evasion
Wojciech Kopczuk, Justin Marion, Erich Muehlegger, Joel Slemrod 30 September 2013
Tax evasion and noncompliance reduce government revenue and exacerbate the problem of increasing debt. Standard economic theory predicts that the identity of the tax remitter shouldn’t affect outcomes – but this ignores the possibility of evasion. This column provides evidence that in the presence of evasion, both the amount of revenue collected and the incidence of burden are sensitive to the identity of the remitter. These results should inform future tax reform.
As many countries struggle with large deficits, some are looking to respond by cracking down on tax evasion. For example, Greece’s medium-term fiscal program assumes an improvement in tax collection of 1.5% of GDP. Achieving such a result generally involves increasing deterrence, by upping enforcement and raising penalties.
Public-debt crises and bad equilibria: Lessons from the GIIPS Countries
Maurizio Bovi 02 December 2011
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.
All the GIIPS countries (Greece, Italy, Ireland, Portugal and Spain) have been hit by the current government debt crisis (see eg Manasse and Trigilia 2011). Yet not all these countries have comparably sized shadow economies or levels of institutional inefficiency (widespread corruption, intrusive bureaucracy, excessive regulations, etc).
Institutions and economics
institutions, tax evasion, public debt
Can financial sector reform help bring informal firms into the formal sector?
Thorsten Beck, Chen Lin, Yue Ma 13 October 2010
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.
While the global crisis has amply demonstrated the economic fragilities that a highly evolved financial sector can create, it is important not to “throw the baby out with the bath water”. The financial sector is critical to the economy. The important connection between financial development and growth is supported by a growing literature (Levine 2005).
taxation, tax evasion, financial development, informal sector
Treasury vs dodgers: A tale of fiscal consolidation and tax evasion
Maurizio Bovi 30 May 2010
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.
A number of European countries – Portugal, Italy, Greece, Spain, and, most recently, Ireland – face public debt sustainability problems (Cabral 2010). They also share a problem of significant tax evasion.
Europe's nations and regions
tax evasion, Fiscal crisis, Eurozone crisis
Lessons from the Russia’s 2001 Flat Tax Reform
Yuriy Gorodnichenko, Jorge Martinez-Vazquez , Klara Sabirianova Peter 19 February 2008
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.
Tax evasion is a pervasive worldwide phenomenon. It is widely believed that high personal income tax rates are partially responsible for high levels of tax evasion everywhere, especially in emerging markets. High personal income tax rates are also often associated with negative effects on the real side of the economy. Indeed, the high elasticity of taxable income with respect to tax rates typically reported in the public finance literature implies sizable deadweight losses in the presence of high personal income tax rates (e.g., Feldstein, 1995).
Russia, flat tax, tax evasion