How To Deal With the Shadow Economy?


CASE Ukraine`s Senior Economist Volodymyr Dubrovsky gave in an article for ‘Ekonomichna Pravda’ media outlet a full picture of how the Ukrainian economy exits the ‘shadow’.

According to the study by the International Association of Certified Accountants and Auditors (ACCA) on the World Shadow Economy, Ukraine ranked third with an indicator of almost 46% of the official GDP. True, Ukrainians are not scared with it.

What is the ‘shadow’ economy?

1) It is not worth to expect reliable figures on this topic. The Ministry of Economic Development considers all losses of enterprises to be ‘shadow’, and ACCAdata are based on a survey of business executives;

2) It will be more precise about the activity scope from which taxes are not paid, or, more precisely, about the amount of budget losses;

3) Economic science evaluates so-called alternative cost of one or another solution’

4) To argue that the budget loses a certain amount of Hryvnia due to unofficial employment is not entirely correct, since it is unknown whether the corresponding jobs would be created in general if they had to pay the unified social tax, the personal income tax, and the military fee;

5) Alternative scenarios can be estimated only hypothetically, so you usually have to use primitive estimates;

6) The lion’s share of the ‘shadows’ is offshore schemes and customs violations. Violations associated with the simplified tax system, despite their mass, do not exceed a tenth of the total volume investigated.

7) An important difference of our shadow economy is its official character. In most cases, which politicians and experts in different parts of the world have to deal with, it is a completely informal activity.

8) Number of pure ‘black marketeers’ grows with each deterioration of the working conditions of the simplified taxation system, since refusing to official registration does not mean abandoning earnings, except in favor of labor emigration.

9) Only the absence of any job or a purely criminal ‘job’ can be worse than ‘shadow’ employment. This is the very first alternative when it comes to minor mass violations.

10) Not always fighting the ‘shadow’ economy is generally justified. It is no coincidence that even developed countries are in no hurry to put on an inspector to each small trader or home-made wizard.

11) Increasing budget revenues does not create value, but only moves resources between sectors. The costs necessary for this, as a rule, are net loss, so not every ‘scheme’ is worth the effort it needs to close it.

12) Progress in the fight against the ‘shadow’, hence the increase in tax revenues, should be accompanied by a reduction in taxes for conscientious payers, since the main reason for ‘shadowing’ is the high level of total tax burden.

13) It is the reduction of taxes has always been and remains the most effective means of getting out of the ‘shadow’. This is especially true of direct taxes on incomes of citizens, especially on labor.

14) De-shadowing strategy is only effective for a corrupt country with deep traditions of disrespect for the law, especially for the tax one.

November 29, 2017