(Page 2 of 4)
In a November 2011 column, CNN's Tim Lister pointed out, “When [researchers] analyzed Europe's 'shadow economies' — defined as areas that fall beyond the reach of the taxman — those of Greece, Italy, Spain and Portugal were much larger (relatively) than those in northern Europe.
“Shadow economy” is an interesting measure. Where tax-compliance rates are often held as closely guarded secrets by somewhat embarrassed tax officials, and even when pried loose may obscure differences in measurement and tax laws, the size of the shadow economy can be calculated independently by economists and used as a handy apples-to-apples comparison.
Professor Friedrich Schneider of the University of Linz is a recognized expert in tracking unofficial economic activity. He defines the "shadow economy" as:
The shadow economy includes all market-based legal production of goods and services that are deliberately concealed from public authorities for the following reasons:
1. to avoid payment of income, value added or other taxes,
2. to avoid payment of social security contributions,
3. to avoid having to meet certain legal labor market standards, such as minimum wages, maximum working hours, safety standards, etc., and
4. to avoid complying with certain administrative procedures, such as completing statistical questionnaires or other administrative forms.
So, we're not talking about illegal drugs or other illicit activities here — the shadow economy reflects only things that would be legal if all the taxes were paid and permits secured.
In The Shadow Economy and Work in the Shadow: What Do We (Not) Know?, Prof. Schneider estimates the sizes of the underground economies of 21 Organization for Economic Co-operation and Development countries as percentages of their official GDPs as of 2007. They're listed below, in ascending order:
- United States: 7.2%
- Switzerland: 8.2%
- Japan: 9.0%
- Austria: 9.4%
- New Zealand: 9.8%
- Netherlands: 10.1%
- United Kingdom: 10.6%
- Australia: 10.7%
- France: 11.8%
- Canada: 12.6%
- Ireland: 12.7%
- Finland: 14.5%
- Germany: 14.6%
- Denmark: 14.8%
- Norway: 15.4%
- Sweden: 15.6%
- Belgium: 18.3%
- Portugal: 19.2%
- Spain: 19.3%
- Italy: 22.3%
- Greece: 25.1%
Sure enough, the United States has the smallest underground economy of the bunch. Fewer Americans than their counterparts in Switzerland, Canada or (especially) Italy and Greece choose to conduct their business out of sight and reach of the tax and regulatory authorities.
The "why" of tax compliance rates certainly depends on a variety of factors, and these likely vary a bit from country to country. Christie and Holzner point to the complexity of tax systems (interestingly, they believe that too much simplicity may reduce compliance), corruption and income inequality as potential influences on tax compliance.
Overall, though, Christie and Holzner conclude that tax rates matter — when rates are higher, people hide more money; when rates come down, people put less effort into evading the authorities. "[W]e found as our most general result that tax evasion is positively correlated with the tax rate itself ... reducing average effective tax rates should positively impact on compliance rates."
Schneider agrees, writing in Shadow Economies of 145 Countries all over the World: What do we really know? (PDF), "In almost all studies it has been found out, that the tax and social security contribution burdens are one of the main causes for the existence of the shadow economy." He adds, "The bigger the difference between the total cost of labor in the official economy and the after-tax earnings (from work), the greater is the incentive to avoid this difference and to work in the shadow economy."
That's not that surprising, is it? If you raise the price of anything, fewer people are willing to pay. There's no reason that shouldn't go for government as much as for cars or potato chips.
But governments are the only vendors that don't let customers walk away. And the U.S, government's latest emphasis on squeezing Americans ever-harder for the change in their pockets isn't exactly a new idea.
In France and Germany, ferocious tax police are kicking in doors in an effort to squeeze the last euros from tax evaders great and small. The German authorities have even taken to paying for data stolen from banks in other countries in an effort to find where the money is hidden.