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 9: Demand-side incentives

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


According to the 2010 survey of European countries, 61 per cent of countries have used direct tax measures targeted at potential purchasers of shadow work. In countries adopting this instrument, 65 per cent of the stakeholders interviewed believed that this was an effective measure for tackling the shadow economy, while 29 per cent viewed it as neither effective nor ineffective, and 6 per cent viewed it as ineffective. In theory, one might simply reduce tax rates. However, this has very wide societal implications and there is no evidence that reducing tax rates reduces the level of the shadow economy (Vanderseypen et al, 2013; Williams, 2014c; Williams and Renooy, 2014). More targeted strategies, however, are available. One option is to give straightforward income tax relief, claimed on (self-assessed) tax returns, to customers using declared labour to do specific household tasks (for example, roof maintenance, outside painting, household cleaning). In the household repair and maintenance sphere, for example, tax rebates on home maintenance expenses have been available in France since 2000, along with tax reductions for house repairs in Italy and Luxembourg.

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