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 11: Broader economic and social policies

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


In this chapter, the argument is that using indirect controls to elicit behaviour change also involves the pursuit of broader economic and social policies. There is emerging recognition that the cross-national variations in the size of the shadow economy is strongly correlated with the wider economic and social environment, and therefore that changing this wider environment might shift work from the shadow into the declared economy (Vanderseypen et al., 2013; Williams and Renooy, 2013, 2014). However, what broader economic and social policies need pursuing in order to enable this to happen? The answer depends on which of three major competing theoretical perspectives one adopts. First, modernization theory asserts that there is a strong correlation between the shadow economy and economic underdevelopment and thus that the shadow economy can be reduced simply by pursuing economic development and modernization. Second, neo-liberal theory asserts that the shadow economy is significantly associated with high taxes, public sector corruption and state interference in the free market and therefore that the way forward is to reduce taxes, deal with public sector corruption and pursue deregulation and minimal state interference in work and welfare arrangements. Third and finally, political economy theory asserts that there is a strong association between the shadow economy and inadequate levels of state intervention to protect workers and therefore that greater state intervention in work and welfare arrangements is required.

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