When businesses hide in the shadows, deregulate or double-down?

It comes as no surprise that the latest estimates of Israel's shadow economy range up to 25 percent of official GDP, or that Italy's unofficial businesses are hauling in the the equivalent of 35 percent of GDP. After all, Israel ranks a sad 48th on the Index of Economic Freedom, dropping it into the "Moderately Free" category. Italy scores even worse—coming in at number 92 for "Mostly Unfree." And both countries are sliding in the rankings.

Friedrich Schneider, an Austrian academic who ranks as one of the world's foremost experts on "shadow" economic activity—business conducted out of the sight of government that would be perfectly legal if forms were filed and taxes paid— says, "tax and social security contribution burdens are one of the main causes for the existence of the shadow economy," and "every available measure of regulation is significantly correlated with the share of the unofficial economy."

Basically, the higher taxes are, and the more entangling the red tape, the more people are willing to hide in the shadows.

Of course, both countries are poised to fix their problems in this age of headline-grabbing economic concerns, right?

Sort of.

Italy's government just pushed through a deregulation bill intended to open up entry to some trades and professions and liberalize the labor market. And Israel? Israel's Tax Authority is hiring 750 new auditors.

It'll be interesting to see which way those shadow economy figures move in the years to come.