Shadow Economies Around the World: Size, Causes, and Consequences

Abstract

The shadow economy includes unreported income from the production of legal goods and services, either from monetary or barter transactions, hence all economic activities that would generally be taxable were they reported to the tax authorities. Prospering shadow economy may cause severe difficulties for politicians because official indicators, on unemployment, labor force, income, consumption, are unreliable. Policy based on erroneous official indicators is likely to be ineffective or worse. The analysis of causes shows that an increasing burden of taxation and social security payments, combined with rising state regulatory activities and labor market restrictions, are the major driving forces for the size and growth of the shadow economy. But an interdisciplinary approach seems to be necessary for a more comprehensive analysis, which would consider aspects like tax morale, perceived fairness of the tax system and institutional aspects as well. The results on the shadow economy's effects on the official economy are ambiguous.