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Mr. Friedrich Schneider and Dominik Enste
This paper presents estimates of the size of the shadow economy in 76 developing, transition, and OECD countries, which are derived by combining figures from different estimation methods. We describe and discuss the strengths and weaknesses of the different estimation methods. We find that the growth of the shadow economy—which is now remarkably large in the 76 countries—is strongly related to increasing burdens of taxation and social security contributions, as well as to the extent of state regulatory activities. Rising corruption also has a clearly positive impact on the growth of the shadow economy.
Mr. Friedrich Schneider and Dominik Enste

policy or economic analyst, or a politician, what is going on in the shadow economy, and even just how big it is, you will get a wide range of answers. In spite of this, there is growing concern over the phenomenon of the shadow economy, and there are several important reasons why politicians and public sector workers should be especially worried about the rise and growth of the shadow economy. Among the most important of these are: If an increase of the shadow economy is caused mainly by a rise in the overall tax and social security burden, this may lead to an

Mr. Friedrich Schneider and Dominik Enste

fact of life—and are now increasing around the world—almost all societies try to control their growth, because of the potentially serious consequences: A prospering shadow economy makes official statistics (on unemployment, official labor force, income, consumption) unreliable. Policies and programs that are framed on the basis of unreliable statistics may be inappropriate and self-defeating. The growth of the shadow economy can set off a destructive cycle. Transactions in the shadow economy escape taxation, thus keeping tax revenues lower than they

International Monetary Fund

that while this share increases early in the transition, it then begins to decrease as reforms progress and corruption is reduced, although in a few countries that have lagged in reform, the authorities have effectively limited the growth of the shadow economy through various controls and sanctions. Thus, Belarus and Uzbekistan have values of 19.3 and 6.5 percent, respectively. What conclusions should be drawn for analysis of growth based on official statistics? Clearly, the extent of the decline inoutput is less than the data show—even more so for consumer welfare

Miss Catriona Purfield and Mr. Jerald A Schiff

evidence is mixed and results are not robust, crosscountry studies generally confirm the negative impact of a high tax burden on economic activity. Firm-level evidence and simulation results are the most conclusive, supporting the view that high tax rates have an adverse effect on growth and distort financing and investment decisions ( Box 9.1) . High tax rates may also contribute to the growth of theshadow economy,” carrying costs in terms of forgone tax receipts and lower productivity growth (Farrell, 2004 ; and Schneider and Klinglmair, 2004) . This chapter

Mr. Jerald A Schiff, Mr. Axel Schimmelpfennig, Mr. Niko A Hobdari, and Mr. Roman Zytek

contributions, the pension systems provided little incentive for employees to contribute into the system or pressure their employers to comply with social tax rules. 10 Third, high payroll taxes not only discouraged tax compliance and encouraged the growth of the shadow economy but also tended to increase labour costs. 11 Fourth, the share of pension expenditure in total government outlays was relatively high, and changing fiscal priorities—in particular growing demand for infrastructure investment, education and medical services, and the need to finance preparations for EU

Mr. Franco Reviglio

the growth of the shadow economy, which has been increasing since the mid-1980s. These authors estimate that about one-third of total unemployment could have been avoided if tax increases had not been implemented. This evidence has found further support in recent research that shows a highly significant and very large effect of labor taxes on the unemployment rate in EMU countries ( Daveri and Tabellini, 2000 ). Similar results, although with estimated smaller coefficients of labor taxes on unemployment, were reached by Nickell and Layard (1999) , and by Blanchard

and investment decisions ( Box 1 ). High tax rates may also contribute to the growth of theshadow economy,” carrying costs in terms of foregone tax receipts and lower productivity growth ( Farrel, 2004 ; Schneider and Klinglmair, 2004 ). To improve the tax intake and savings and investment rates, which are low by regional standards, 2 a series of tax reforms have been considered in India. 3 Their main thrust is to combine lower statutory rates with base broadening, to realize more revenues while lowering the marginal tax burden and removing distortions. This

This paper assesses the effects of India's tax system on growth, through the level and productivity of private investment. Comparison of India's indicators of effective tax rates and tax revenue productivity with other countries shows that the Indian tax system is characterized by: (1) a high dependence on indirect taxes, (2) low average effective tax rates and tax productivity, and (3) high marginal effective tax rates and large tax-induced distortions on investment and financing decisions. The paper finds that the most recently proposed package of reforms would improve tax productivity and lower the marginal tax burden and tax-induced distortions. But firms that rely on internal sources of funds or face problems borrowing would continue to face high marginal tax rates.
Evgeny Gavrilenkov and Mr. Vincent Koen

estimates were used. Moreover, no conjectures about the size and growth of the shadow economy are introduced, nor is there any speculation about the quantitative effect of improvements in the quality of output. 25/ Therefore, the resulting real GDP path should be interpreted as a lower bound rather than as the most plausible estimate of actual GDP. Starting from 1990, 26/ and using prices of 1990, the expenditure side of GDP is adjusted in the following way (see Table 5 for details). Household consumption was augmented taking into account the revisions appearing