Confronting the Shadow Economy

Confronting the Shadow Economy

Evaluating Tax Compliance and Behaviour Policies

Colin C. Williams

Beginning with a review of the extent of undeclared work, the author discusses the discrepancies between regions and the potential impacts of the economic crisis, comparing the nature of the potential solutions available with those actually adopted. The way forward, the book concludes, is to move away from increasing the costs of engaging in hidden work using repressive measures, and concentrate more on developing initiatives that enhance the benefits of engaging in declared work and increase the likelihood of compliance by engendering a commitment to tax morality.

Chapter 4: Evaluating the policy options

Colin C. Williams

Subjects: business and management, business ethics and trust, economics and finance, economic crime and corruption, labour economics, public choice theory, public finance, politics and public policy, political economy


A first option is to do nothing. Policy-makers could choose to either ignore the shadow economy or to put it another way, adopt a ‘laissez-faire’ approach towards such work. Superficially, it seems obvious that governments would wish to tackle the shadow economy, not least in order to facilitate economic growth and raise tax revenues in a fair and just manner in order to pay for wider social cohesion measures. Nonetheless, there are rationales for doing nothing. First, there is the cost to government of tackling the shadow economy. It might well be the case, especially when the shadow economy is relatively small in a country, that the revenue-to-cost ratios are so low that it is just not worthwhile for governments to intervene to reduce its size. Second, it could be argued that since the shadow economy is a test-bed out of which emerges many, if not the majority, of new business start-ups, and the breeding ground for enterprise creation (Williams and Martinez-Perez, 2014a), this sphere should be left alone. Third, in many countries much of the shadow economy is composed of paid favours, which represent a main vehicle for delivering active citizenship.

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