Effects of formalisation of the shadow economy

Abstract

Based on the estimate of the tax evasion gap, this chapter looks at the benefits of a reduction in the shadow economy-or, rather, the reintegration of a portion of it into the formal economy-to the Serbian budget. We show separate estimates of possible fiscal effects for the three key types of public revenue for which we have estimated the tax gap: value added tax, personal income tax, and social security contributions. The chapter also considers how formalising the shadow economy affects economic growth. Although there is a large body of empirical research on the impact of the shadow economy on economic growth, there are still no unequivocal empirical and theoretical findings. The basic question is this: Is the shadow economy a positive phenomenon? In other words, does it make a positive contribution to economic growth? The answer to these questions result in two possible avenues of approach for government policy on the shadow economy: tolerance or active suppression.