Why so little revenues are obtained from a presumed large shadow economy?

This paper deals with the gap between very high estimates of the size of the shadow economy and the small amount of government revenue that is obtained by means of tax inspections and regulatory activities. We use Finland as an example of a country where substantial amounts of new resources have recently been devoted to shadow economy inspections at the same time as new regulations have been introduced to curtail shadow economy activities. Thus far, the fiscal results appear to be very modest. We use new micro data from the Finnish Tax Administration’s tax audits to examine the reasons for this disappointing result. It appears that, to a large extent, the explanation is related to the small size of the shadow economy firms, poor economic performance of the firms, the judicial forms of the firms, and to foreign ownership. Against this background it does not seem likely that much more revenue could be generated from the shadow economy activities in the future. It may also be that the result reflects the fact that the shadow economy is, after all, much smaller than what is argued in public debate. Copyright Springer-Verlag Berlin Heidelberg 2015