0 valutazioniIl 0% ha trovato utile questo documento (0 voti)
142 visualizzazioni8 pagine
Underground activities can be either legal or illegal, and can involve pecuniary or non-pecnnniary transactions. Tax Evasion refers to concealment and / or misrepresentation of the size and source of income. Tax Avoidance relates to taking advantage of the tax code by exploring the loopholes.
Underground activities can be either legal or illegal, and can involve pecuniary or non-pecnnniary transactions. Tax Evasion refers to concealment and / or misrepresentation of the size and source of income. Tax Avoidance relates to taking advantage of the tax code by exploring the loopholes.
Copyright:
Attribution Non-Commercial (BY-NC)
Formati disponibili
Scarica in formato PDF, TXT o leggi online su Scribd
Underground activities can be either legal or illegal, and can involve pecuniary or non-pecnnniary transactions. Tax Evasion refers to concealment and / or misrepresentation of the size and source of income. Tax Avoidance relates to taking advantage of the tax code by exploring the loopholes.
Copyright:
Attribution Non-Commercial (BY-NC)
Formati disponibili
Scarica in formato PDF, TXT o leggi online su Scribd
‘Table 1, A Taxonomy’
f Underground Economic Activities
NUST Journal of Business and Economics
‘Monetary Transactions
Mlegai Activities
smuggling and fraud,
‘Trade in stolen goods; drug dealing and
manufacturing; prostitution; gambling;
Non-monetary Transactions
Barter: drugs, stolen goods, smuggling etc.,
Cultivation of drugs for self-use, Thett
salaries, and assets from
unreported work related
to legal activities.
Tax Evasion ‘Tax Avoidance ‘Tax Evasion Tax Avoidance
Tegal Activities Unreported income from | Employee discounts, | Barter of legal services | All do it yourself and
self-employment; wages, fringe benefits and goods neighbor help activities
(Original Source: Micus and Smith (1970, pS), with minor changes in some of the calls.
Recognizing the seriousness of the topic, the present
study rekindles the debate on the underground economic
activities to understand the difference between the
recorded and the hidden components of the economy. A
critical review of the empirical work is undertaken 10
clarify the ambiguity about the size of the underground
economy in Pakistan and the inferences drawn for the
economy in general and the fiscal policy in particular
What Constitutes UGE?
Before proceeding further, it may be relevant to identify
UGE. The underground activities can be either legal or
illegal, and can involve pecuniary or non-pecuniary
transactions. Out of these four distinct possibilities,
attention is generally restricted to legal activities involving,
monetary and non-monetary transactions. Thus, the
empirical work relatcd to UGE concentrates mainly on
incomes generated through legal activities that are
somehow concealed from tax authorities. This explanation
necessitates a further distinetion between (ax evasion and
tax avoidance as these concepts are interconnected with the
hidden economy. Whereas the former refers 0
concealment and/or misrepresentation of the size and
source of income, tax avoidance relates to taking
advantage of the tax code by exploring the loopholes.
Usually, tax evasion is nothing short of delinquency, but
the same is not true for tax avoidance, ethical
considerations notwithstanding. Based on this elaboration,
the taxonomy of underground activities is summarized in
‘Table 1. which is extracted from Schneider and Enste
(2000, page 79),
“Measurement” of UGE
By its peculiar nature, the size of UGE is difficult to
measure. Nonetheless, numerous efforts have been made
during the past three decades to “estimate” the unrecorded
component of GDP. This process is continuing unabated
and there is no end in sight” According to Feinstein
(1999), “as long as eriminal activity in all ts mnysiad forms
remains an important social problem there is « need for
For a comprehansive survey ofthese eons, see Schnoider and Ente
(2000) op ct andthe Spail Suploment of the Economic Journal, 1299,
1n the Gonoversyon Hidden economy, See eso Lope. O. and M
Waker (1907
some means of assessing the nature, incidence and
magnitude of this activity, both for general education and
for policy formulation.
‘The four approaches commonly used to comprehend
the nature and the size of UGE are: (a) direct estimation,
either through detection-controlled methodology whereby
tax non-compliance data are used to measure the degree of
tax evasion, or through the use of tax surveys; (b) indirect
estimation based either on one of the many different
variants of monetary approach or alternatively through
discrepancy analysis on the basis of national income and
expenditure statistics or actual and official labor force data.
The difference between the two in ether of the two cases is
regarded as an indicator of UGE; (c) physical input
(electricity consumption) method which results into proxy
measurement of the overall economy and its difference
from official GDP yields estimates of UGE; and finally (4)
dynamic multiple-indicators multiple-causes model where
unobserved variables are linked with observed indicators
UGE being one of the unobserved variables ina
simultaneous equation system is designed 10 have
structural dependence on observable variables, which help
in predicting the movement and size of UGE in the foture
How Reliable are the UGE Estimates?
Despite this large array of estimation techniques, it is still
not clear what is being measured, Apart from definitional
vagueness and weak theoretical foundations, the
quantitative estimates also suffer from vulnerable
Lnderpinnings. To add insult to injury, heroic assumptions
fare made to justify manipulation of certain numbers
[Thomas (1999) It s amazing to see that no two estimates,
of the empirical research, even in the case of developed
economies, match with each other. Keeping in view the
sensitivity of the UGE estimates to estimation techniques,
the information in Table 2 rately restricted 10
OECD countries for the simple underlying belief that the
“official” GDP statistics of these countries are
comparatively more reliable than those for the developing
countries
‘A cursory look at the information indicates that the
estimates of gray economy for most of the OECD countries
are as murky as the shadow component of the economy
itself. It appears that the general observation regarding‘Underground Economy in Pakistan: How Credible are the
‘Table 2, Estimates of UGE as % of GDP for Selected OBCD Countries
imates? - ther Magsood Aled 3
comtey Currency Demand Approach Physical Input Method
1930 1939-90 1990.93 1990
‘Austria 3d 5 61 155
Belgium 16.4 193 208 198
Canada 107 128. Bs ua
Denmark 86 108 15 169
France 69 9 Bs 123
Germany 108 los. 12s 146
Ireland 8 " 142 206
Tay 167 28 24 196
Netherlands 94 19 127 1B
Norway 106 148. 167 93
Spain Na 16.1 173 29
Sweden 122 ase 7 u
Switzerland 65 67 69 102
UK 84 96 m2 Bt
USA 5 67 82 105
Average 95 122 4 148
Source: Schneider (1997) and Schneider and Enste (2000)
ever-growing nature of the hidden economy stands
vindicated — the average share of UGE in GDP has
increased from 9.5% in 1980 to 14% in 1990-93. However,
the surprising element is the speed at which this share has
grown in some of the economics, especially in the
Scandinavian countries, as compared to others. ‘The
discomfort intensifies further when these “estimates” are
compared across estimation techniques. To emphasize this
point, the UGE estimates for Switzerland are picked as an
example. The evidence confirms that based on the currency
demand approach, the share of gray economy was less than
7% in 1990; the physical input method inflates this share to
‘more than 10% —a difference of nearly 48%. A similar but
contrasting distortion is present for other countries
especially Austria, Norway, and Sweden,
Extending the argument further, itis rather surprising
to note that the discrepancy in UGE estimates is increasing
overtime despite the fine-tuning of the estimation
techniques. Schneider and Enste (2000) have exposed the
divergence in the size of UGE relative to GDP in five of
the OECD countries. The study shows that, based on nine
estimation techniques covering a time horizon of 1986-90,
the relative size of UGE ranged between 1.4% and 21.2%
in Canada, 11.3% and 31.4% in Germany, 6.2% and 19.4%
in the USA, 9.79% and 13.2% in the UK, and 9.3% and
21.3% in Italy. This conspicuous difference clearly puts a
big question mark on the reliability of UGE estimates and
their literal obedience by practitioners to draw implications.
for various segments of the economy including the fiscal
sector
Evidence from Pakistan
Similar to other countries, the measurement of UG
continues to be a favorite pastime of researchers in
Pakistan as well. A number of studies have been completed
since 1990 not only to quantify the size of UGE in relation
to GDP, but also to estimate the extent of tax evasion in the
country.” However, unlike elsewhere, these studies have
concentrated on the monetary approach — originally put
forward by Cagan (1958) and later on extended by Tanzi
(1980, 1983), which assumes that transactions in the UGE
are largely funded by cash in order to reduce the chances
of detection. This, in turn, requires a larger than reasonable
level of circulation of currency in the cconomy. Without
going into finer details, Tanzi's approach is briefly
explained in the following, as a starting point for the later
discussion,
‘The monetary approuch develops a_ relationship
between currency (relative to a suitable scale factor such as
“These nous Shabsigh,G. (1995). Ahmed, Mand. A. Abed, (1995),
Igoe, Z. Qureshi. K, and F. Mehmood (1895), Ata, & (1998), At
‘ema (2003) Busha ar Rau! (2004, Ane and Hussain (2006), and
‘At Kemal 2007)