Estonia ranked 2nd by volume of shadow economy
16.08.2010, 09:16Estonia has one of the largest shadow economies, according to a survey by economist Friedrich Schneider from Austria's University of Linz that covered 37 countries.
The report that measured the size of shadow economy as percentage of GDP claims that 40 % of all business transactions in Estonia are not taxed. Four years ago the share of shadow economy was even higher, at about 42%.
On the top of the list was Latvia, with shadow economy accounting for 42% of the country's GDP, followed by Estonia, Bulgaria, Turkey and Greece.
The countries topping the chart by the smallest share of informal transactions, below the average for those studied, are the US, Japan, the UK and Germany.
According to the survey, the average volume of unofficial business in 37 countries is slightly over 20% of GDP.
The report reveals the size of the so-called shadow economy around the world is growing. It points out that for the first time in a decade, transactions taking place outside the taxable and observable frame of the official economy captured by GDP numbers are increasing.
In Schneider's approach, shadow economy does not mean ill-gotten gains here, but legal economic activity that is not taxed. Mr Schneider attributes this reversal to the financial crisis, which seems to be pushing more people in OECD and EU countries to avoid the extra burden of taxation by resorting to informal transactions. The shadow economy, in other words, can act as a cushion when times are tough.
Schneider argues that each country runs two economies – an official one and a shadow one. The official economy is measured by central government via GDP, tax revenues, social security contributions and the like, while the shadow economy covers all money and jobs that have not been declared and levied with taxes.
The author attributes this growth of informal transactions to the financial crisis.
Also an IMF report made in 2002 found that, because most of the money made in the unofficial economy is spent—and taxed—in the official economy, it is difficult to assess whether the overall impact of the underground economy is negative or positive. “The shadow economy creates additional income and welfare which wouldn’t otherwise exist during this recession,” says Schneider.
Changing citizens’ attitudes to paying tax will be harder still. According to Schneider, a lot of evasion is down to “tax rebellion”. People simply do not feel that the services the state offers are worth paying taxes for. Improving those services is the work of years, not months. As for the idea that southern Europeans have a greater natural propensity to cheat on their taxes than virtuous northern types, that looks like hooey. A study earlier this year described the results of a tax-audit experiment in Denmark, which showed that rates of evasion shot up when Danes reported their own income.