Size, Causes and Consequences of the Underground Economy

Chapter 5An International Comparison of Underground Economic Activity

Friedrich Schneider and Christopher Bajada

Introduction

Despite continuous government attempts to increase taxpayer compliance, the underground economy continues to offer an avenue for taxpayers to evade their tax paying obligations. The consequences are clear: policymakers have imperfect knowledge on the state of economic affairs, more so as underground economic activities increase.

Estimating the size of the underground economy is an onerous task. Any serious attempt to gauge its size should be able to measure a broad range of activities. These activities may include income generated from (say) babysitting, bartering of services, income evaded by (say) a mechanic who chooses ...