Size, Causes and Consequences of the Underground Economy

Chapter 7The Shadow Economy in OECD and EU Accession Countries – Empirical Evidence for the Influence of Institutions, Liberalization, Taxation and Regulation

Dominik H. Enste

Introduction

Tax evasion, illicit work and social security fraud are widely spread. Most governments focus on fighting this deviant behaviour by punitive measures. But empirical data shows contrary to standard economic theory, that this way is expensive, inefficient and, finally, unsuccessful. Governments have to change institutions (e.g. tax system) and regulations to reduce incentives for illicit work and tax evasion. An increasing burden of taxation and social security contributions are – as well as regulations and the poor quality of institutions – the driving forces ...