NCPA - National Center for Policy Analysis

Size Of Underground Economies

May 3, 1997

Just how big are underground economies -- in which income from enterprises both legal and illegal goes unreported to the tax man?

  • Off the books dealings may account for one seventh of total output in the world's wealthiest countries, economists surmise.
  • Some experts say that it may even account for more than one-fifth of GDP in Belgium, Italy and Spain.

Heavier tax burdens and more complicated tax forms may be responsible for the underground economies in wealthy countries growing three times as fast as official ones since the 1960s.

  • Unreported income in the U.S. has been estimated at between 10 percent and 15 percent of GDP.

Growth in the service sector of industrial economies in recent years has probably contributed to an increase in the underground economy -- since it is easier to hide pay for services than it is to hide large manufacturing facilities.

Italy has been especially active in cracking down on unreported income, going so far as to station tax policemen outside shops and restaurants. Patrons emerging from these business must produce a receipt for purchases or be fined.

A better solution, however, would be to reduce the incentive to take business underground by reducing tax rates, deregulating labor markets and cutting red tape, say many experts.

Source: "Light on the Shadows," Economist, May 3, 1997.


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