Measurement of the shadow economy is notoriously difficult as it requires estimation of economic activity that is deliberately hidden from official transactions. Surveys typically understate the size of the shadow economy but econometric techniques can now be used to obtain a much better understanding of its size.
Measurement of the shadow economy is notoriously difficult as it requires estimation of economic activity that is deliberately hidden from official transactions. Surveys typically understate the size of the shadow economy but econometric techniques can now be used to obtain a much better understanding of its size. The shadow economy constitutes approximately 10 per cent of GDP in the UK; about 14 per cent in Nordic countries and about 20 - 30 per cent in many southern European countries. The main drivers of the shadow economy are (in order): tax and social security burdens, tax morale, the quality of state institutions and labour market regulation. A reduction in the tax burden is therefore likely to lead to a reduction in the size of the shadow economy. Indeed, a virtuous circle can be created of lower tax rates, less shadow work, higher tax morale, a higher tax take and the opportunity for lower rates. Of course, a vicious circle in the other direction can also be created.
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"A study by a free-market thinktank, the Institute for Economic Affairs, estimated that paid work not declared to the taxman was worth 10% of national income in 2012, half the level in Italy, Greece and Spain. The report, by economists Friedrich Schneider and Colin Williams, found that the UK's shadow economy was smaller than the 13.4% average for the 34 developed nations in the Organisation for Economic Cooperation and Development. The UK rate peaked at 13% in 1997-98." Larry Elliott, 'The Guardian'
About Friedrich Schneider
Friedrich Schneider has been a professor of economics at Johannes Kepler University in Linz, Austria for 27 years. He is the former European editor of Public Choice and has published extensively in leading economics journals, including the American Economic Review, the Economic Journal, and the Quarterly Journal of Economics. Colin C. Williams is a professor of public policy and the director of the Inter-Disciplinary Centre of the Social Sciences at the University of Sheffield.
Shadow Economy by Friedrich Schneider
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Institute of Economic Affairs
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