Shadow economy and tax evasion in the EU

Author:Friedrich Schneider, Konrad Raczkowski, Bogdan Mróz
Position:Department of Economics, Johannes Kepler Univeristy, Linz, Austria; Institute of Economics, University of Social Sciences, Warsaw, Poland; Department of Management, Warsaw School of Economics, Warsaw, Poland
Pages:34-51
SUMMARY

Purpose - The main purpose of this paper is to explore size of the shadow economy of 31 European Countries in 2014 and size of the shadow economy of 28 European Union countries over 2003-2014 (in per cent of official GDP). An additional objective is to identify tax evasion, as the problem of all the EU countries, answering the questions how better combat the tax fraud. Design/methodology/approach - Estimates of the shadow economy for all 28... (see full summary)

 
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Shadow economy and tax
evasion in the EU
Friedrich Schneider
Department of Economics, Johannes Kepler Univeristy, Linz, Austria
Konrad Raczkowski
Institute of Economics, University of Social Sciences, Warsaw, Poland, and
Bogdan Mróz
Department of Management, Warsaw School of Economics, Warsaw, Poland
Abstract
Purpose – The main purpose of this paper is to explore size of the shadow economy of 31 European
Countries in 2014 and size of the shadow economy of 28 European Union countries over 2003-2014 (in
per cent of ofcial GDP). An additional objective is to identify tax evasion, as the problem of all the EU
countries, answering the questions how better combat the tax fraud.
Design/methodology/approach – Estimates of the shadow economy for all 28 European Union
countries and other three countries from Europe, i.e. Norway, Switzerland and Turkey – MIMIC method
was applied.
Findings – The average size of the shadow economy in 28 EU countries was 22.6 per cent in 2003 and
decreased to 18.6 per cent (of ofcial GDP) in 2014. We also consider the most important driving forces
of the shadow economy. The biggest ones are with 14.6 per cent unemployment and self-employment,
followed by tax morale with 14.5 per cent and GDP growth with 14.3 per cent. The proportion of tax
evasion (accounting for indirect taxation and self-employment activities) was on average 4.2 per cent (of
ofcial GDP) in Poland, 1.9 per cent in Germany and 2.9 per cent in the Czech Republic.
Research limitations/implications The MIMIC statistics do not address a large part of the
wholly illegal economy (of typically criminal nature) and, accordingly, it is not an absolute magnitude
of the whole unofcial economy. However, it does not seem that other, alternative, methods of
measuring the unofcial economy are better in individual terms.
Practical implications Current statistical research should lead to practical acceptance in the
framework of need for developing better organizational & legal ways for multi-level governance within
the European Union, leading to effective methods of counteracting – in particular intra-Union fraud. In
addition, the presentation of a review of typology of the main theories and studies regarding the
unofcial economy aspects relating to tax evasion constitutes a practical review of the pursued research
areas.
Social implications – Safeguarding the national economy as a whole, by seeking ways of reducing
the scope of shadow economy.
Originality/value Both regarding presentation of the latest shadow economy estimates and
typology of its main studies and theories.
Keywords Tax evasion, Shadow economy, Economic growth, Reverse charge, Tax avoidance
Paper type Research paper
JEL classication – D78, H11, H26, K42, O57, U17
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1368-5201.htm
JMLC
18,1
34
Journalof Money Laundering
Control
Vol.18 No. 1, 2015
pp.34-51
©Emerald Group Publishing Limited
1368-5201
DOI 10.1108/JMLC-09-2014-0027
1. In lieu of Introduction – what do we know about shadow economy?
Unofcial economy (shadow economy) should not be associated exclusively with the
media picture of grey zone (grey economy), as this would be a mistake. It is a natural
element of the economic/social life and should be considered in such a context.
From the denition perspective, the term shadow economy can be applied to
unregistered activities aimed at yielding tangible benets, in either natural or in
monetary form, generating given consequences of value creating and/or distribution
character (Mróz, 2002).
The entire subject and object contents of shadow economy stem from entirety of
economic endeavour (Figure 1), based in this review on modied distinction of three sectors
in the economy, according to the A. G. Fisher-Clark model, supplemented with the fourth
sector of information and knowledge. From the shadow economy perspective, it is this fourth
sector which is of fundamental signicance and which is decisive for the opportunity to
create value by minimizing the information gap in decisions undertaken – both the legal ones
(ofcial economy), semi-legal (semi-legal grey economy operations) and the entirely
unlawful actions (shadow economy – entirely illegal) (Raczkowski, 2013).
2. Theoretical considerations
A signicant role in this model is played by the tax system, particularly in relation
to the grey economy. It should be noted that only and exclusive resort to tax
optimization and tax evasion at that causes this to become grey economy. Should the
taxpayer fail to meet these criteria (even in the least degree) and pay taxes, then the
taxpayer operates within the ofcial economy. Still, in the light of extensively
developed tax engineering by many corporations, where the given corporation holds
an evident intellectual and technological edge over the given scal jurisdiction, the
fundamental question arises: when does one speak of optimizing tax, and when does
such optimizing imply wilful tax evasion? There is no explanation such as that an
international corporation active in the given area notoriously reports losses and
pays no taxes. In the vast majority of cases this is a typical crime in the eye of the law
and should be identied and qualied as such. Such an approach represents also
unfair competition, eliminating the law-abiding businesses from the market. Tax
administration of the given country which refrains from instituting proceedings in
such cases acts to the detriment of State Treasury and reconciles of own accord to
reduced revenues for the entire state budget, contributing negatively to the amount
of decit or public debt (Raczkowski, 2014).
More than forty years have passed since M. Allingham and A. Sandmoback in
1972 published the rst more solidly documented theory of tax evasion, where the
taxpayer as part of self-assessment selects or declares true income, or perhaps
declares a lesser income than the one earned in reality. The taxpayer’s choice was
dictated by the taxpayer’s own perception of probability of tax control and possible
ne for under declaring income versus the prot gained by maximizing the amount
withheld (Allingham and Sandmo, 1972). Many years later other tax evasion models
have been formulated, which as theories came up much later than their practical
implementation in economic turnover. As an example one can cite the model of VAT
fraud as part of so-called intra-community deliveries (Fedeli and Forte, 2008), where
it is relatively easy to swindle undue tax from the tax authority in connection with
exporting a give type of commodity abroad (within the EU). Practical dimension of
35
Shadow
economy and
tax evasion in
the EU

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