Chapter 6: Deterrence measures
In the direct controls approach, the aim is to ensure that benefits of operating in the declared economy outweigh the costs of working in the shadow economy. This is accomplished either by using deterrence measures to increase the costs of non-compliance (‘sticks’) and/or by making the conduct of declared work more beneficial and easier (‘carrots’). In the deterrence approach, the goal is to increase the actual or perceived costs of operating in the shadow economy. This is accomplished by either increasing the perceived or actual likelihood of detection and/or the penalties for those caught (for example, Allingham and Sandmo, 1972; Hasseldine and Li, 1999). In this chapter, first, the various measures used to improve the actual or perceived likelihood of detection and, second, the effectiveness of penalties and sanctions as a tool for reducing the shadow economy, are evaluated. To commence, therefore, this chapter reviews the array of measures used to improve the perceived or actual likelihood of detection. This includes the use of workplace inspections, the registration of workers, identity cards, business certification and payment certification of tax and social security contributions, certified cash registers, deterring cash payments, notification letters, peer-to-peer surveillance, the coordination of strategy and operations across government and the coordination of data sharing and data matching to improve detection.
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