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Underground economy

The trinidad Guardian / In every country in the world, there are transactions that occur in the formal economy, and those that occur in the underground or “black” economy.

In a technical sense, many transactions that people take for granted make up part of the underground economy.

The underground economy therefore, can be defined in two ways: it can refer to outright illegal economic activity, or activity that falls outside of the tax loop of a country.

For example, if you pay your cleaner or builder in cash, or for some reason neglect to tell the tax authority that you were paid for a service rendered, you participate in the underground economy.

Similarly, activities that are banned by law such as drugs, prostitution and human trafficking also fall into the underground economy.

As such, members of the underground economy are typically a diverse bunch.

Because of its very nature, the underground economy is extremely difficult to measure – it is not subject to government oversight and does not generate tax returns or show up in official statistics.

That said, discrepancies in these statistics can indicate the approximate size of underground economies.

For example, a country’s income and its expenditure would in theory be identical, if every transaction were fully visible to the people compiling the data.

In practice, though, expenditures exceed income, because income from an illegal transaction will not appear in the data, but that money will show up in expenditures when it is used in a legal transaction.

The underground economy can be benign or harmful, depending on the perspective and economic context.

In developing countries, the share of the underground economy is relatively large compared to the developed economies.

This tends to be bad for the government of developing countries since they can often ill afford to forgo tax revenue on a large share of transactions.

That in turn is bad for citizens, including participants in the underground economy, which do not enjoy quality government services.

On the other hand, keeping income that might otherwise be taxed can benefit participants in the underground economy and boost economic activity overall through added demand.

That is especially true if tax revenues would just be siphoned off by corrupt officials rather than funding the government – another aspect of the underground economy.

In T&T, estimates vary about the size of the underground economy.

According to academic studies, the size of the hidden economy rose from a low of about 14 per cent of measured GDP in the early 1970s to a high of 36 per cent in 1980’s It has been speculated that the size ranges between $15 billion and $60 billion today.

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