NCPA - National Center for Policy Analysis


July 29, 2004

Even though about 50 percent of the officially measured gross domestic product in France, Germany and Italy goes through the state coffers, the three find it increasingly difficult to pay their bills. It has long been argued that the high tax rates in these countries, particularly on the margins, simply stall economic growth and depress tax revenues rather than boosting them.

In the United Kingdom, on the other hand, where taxes are generally lower, the economy and public finances are in much better shape and although London has not adopted the single currency, it is alone among the big European countries in meeting the euro zone's strict budget rules.

High taxation drives a significant part of the economy underground, further reducing state receipts. A European Commission report this month shows a strong correlation between high income and social taxes and the magnitude of the black market economy:

  • While the French and German black economies are estimated to be about 6 percent of GDP, undeclared work in the United Kingdom is estimated to be a mere 2 percent.
  • The estimated black economy in Italy equals 18 percent of (beaten only by Greece's 20 percent).

Of course, there are other factors determining the size of the black economy, notes the report, but many of those other factors are usually associated with high-tax countries, such as labor market rigidity and regulatory and administrative burdens.

Another reason for regional differences in tax law obedience is what the report delicately calls "cultural traditions." The large black economies in many East European countries are likely an overhang from Communist days. But as trust in the state improves and economic reforms take root, their underground economies seem to be shrinking.

Source: Editorial, "Europe's Black Economy," Wall Street Journal, July 29, 2004.

For WSJ text (subscription required),,SB109105191410476872,00.html


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