Shadow Economy, Tax Evasion, and Transfer Fraud – Definition, Measurement, and Data Problems

Abstract

The paper tries to shed some light on the definition of the shadow economy, in order to separate shadow activities from market activities and household production. A total income concept is applied, which is based on the labor force being engaged in market, shadow and household activities. Based on such a clear concept, tax evasion can be defined and identified in the market sector and is also usually taking place in the shadow economy, where it is often accompanied by evasion of social security contributions as well as transfer fraud. Money usage in the three sectors is then critically analyzed, and measurement as well as data problems are seriously taken into consideration. The results of our research project suggest that the size of the shadow economy as estimated with the currency approach often yields the highest possible values. Other approaches and plausibility considerations produce much lower values, which seem to be much more realistic. Consequently, policy considerations to strengthen the control mechanisms should be met with utmost skepticism.

Other Macroeconomic Estimations

“…shadow eConoMy and MarkeT aCTIvITIes Petersen et al (2010) present no estimate of the shadow economy. Rather, they try to shed some light on the definition of the shadow economy, in order to separate shadow activities from market activities and household production.…”

“…Tax evasion and transfer fraud go hand-in-hand, making poverty an ever-persisting phenomenon, which also creates some jobs in the 'welfare industries', where the engaged people are always complaining about a permanently rising gap in between 'the poor' and 'the rich' and increasing poverty -thus, guaranteeing them even more work for the coming generations. Petersen et al (2010) suggest that tax evasion can be defined and identified in the market sector, and it is usually taking place in the shadow economy, where it is often accompanied by evasion of social security contributions as well as transfer fraud.…”

“…In comparison, the shadow economy is estimated at 16 percent in Belgium, 14 percent in Sweden, 13 percent in Denmark and Germany, and 8 percent in Austria. Petersen et al (2010) suggest that the shadow economy can be identified as a single sector if a precise theoretical separation between sectors is made. If a clear concept of shadow activities is applied, the problem of tax evasion can also be identified in an appropriate way: tax evasion can take place in the market economy as well as in the shadow economy.…”

A Righteous Undocumented Economy

“…Some of those works, primarily from accounting, tax, and macro-economics journals, dwell on the disreputable elements of informal economies, mainly tax evasion, criminal activity, and labor standards violations. However, other literature focuses on informal economy components that are not necessarily nefarious because their participants do not deliberately intend to break the law (International Labour Organization 2013); the activities fit the definition of subsistence activity or household production (Petersen et al 2010); the outcomes from the informal activity support formal elements of the economy (Darbi et al 2016), and the activities are considered to be legitimate by large groups of people (Webb et al 2014). But, there is no single term in current use that refers to relatively significant components of economies that are informal, but essentially righteous.…”

“…By expanding the polar concept of formal and informal economies into formal, informal, and renegade, Webb et al (2009) equated informal to our concept of an undocumented economy. Petersen et al (2010) noted that a distinction should be made between criminal activities that do harm to society and shadow economy activities that, despite their association with tax evasion and transfer fraud (when individuals benefiting from social welfare transfers are also illicitly collecting income from work they are doing), can increase overall income and wealth. They also acknowledged that modern economies include some subsistence activities that are part of the informal economy, but are not nefarious.…”