‘All shades of grey’: Who wins and loses in shadow economy?

Reuters / Francois Lenoir
On average a shadow economy increases the gross national product of a country, but state institutions are affected as people don’t pay taxes and social contributions, Dr. Friedrich Schneider, an economist at the University of Linz, told RT.

With high taxes, rising unemployment and social insurance contributions more Austrians prefer to move into the shadow economy which is expected to account for around 8 percent of GDP this year.

“A shadow economy is not a bad thing. It creates additional goods and services. Value added is also created. A big loser is a state because of taxes and social security contributions. Because by definition a shadow economy worker doesn’t pay any taxes and social security contributions. A shadow economy is not simple black and white, it has all shades of grey in between,” Dr. Friedrich Schneider claims.

He adds that as for the European Union the size and development of the Austrian shadow economy is particularly low. He says it is much higher in Germany, Italy and in Eastern Europe. The highest increase is in Bulgaria and Romania.

“It really depends how large the shadow economy is. The Austrian size of the shadow economy, except for Romania, Bulgaria, Italy and Greece, is not so large. It’s not that it has so less social contributions that it can’t afford to pay for its unemployed. But in countries like Russia, Kazakhstan, Tajikistan and other ones where you have the size of shadow economy up to 40-50 percent [of GDP], a shadow economy is a serious threat to a lot of people.”

In countries like that according to Dr. Schneider we have more distinct losers and winners. “So those who work in the shadow economy are the winners, those who can’t work are the losers. But it varies within the European Union. We have Austria with 8 percent, Bulgaria with 27 percent, that’s three times higher. So it’s simply not possible to make some general remarks, one can only analyze it from country to country.”

Dr. Friedrich Schneider also says people can limit the increase of the shadow economy. “One should undertake strong efforts to legalize shadow economy activities, to create incentives that people do within the official economy like tax exemptions and more liberal regulations. But again this differs from country to country.”

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.