The shadow economy in Europe

In almost all OECD countries, the shadow economy displays a long-term growth trend and accounts for an important portion of GDP. The differences between individual OECD countries is considerable. The shadow economy in Germany has also grown in the past 25 years: from 5.8% of GDP in 1975 to 15.6% in 1999 and an expected 16% this year. The main reasons for informal economic activity are high taxes, government regulation intensity and the number of small enterprises. Although the shadow economy cannot be viewed as harmful in and of itself, it has serious detriments. First, the statutory tax rates are high and the tax base is lower. Second, in the shadow economy the advantages of company-internal division of labour cannot be fully utilised so that productivity in the shadow economy is probably lower than in the official economy. Third, economic actors use and profit from the possibilities of the shadow economy to very different extents. For this reason the excesses of the shadow economy and its permanent growth are causes for concern and for action. A general intensification of tax collection for all enterprises equally and a lowering of the statutory and actual taxes on business are sensible measures in the long run for reducing or at least containing the growth of the shadow economy.