Recently The Timesin the UK ran an article under the headline ‘Revenue Steps up Moonlight Hunt’. This followed a decision by the Inland Revenue to deploy another 850 staff to work specifically on tracking down moonlighters, who, so the article claimed, are ‘part of Britain’s thriving black economy’.
Of all the various direct and indirect methods used to estimate the size of the so-called black economy, the ones that are most frequently used are those based upon monetary indicators, and in particular the amount of currency in circulation.
Chapter 2 examined four basic approaches to the estimation of the size of the black economy, all of which were based upon the use of various monetary statistics/indicators. Chapter 4 will examine in detail various other methods of measurement that have been proposed. These methods are based upon the use of national accounts statistics, labour-force participation rates, surveys of household income and expenditure, tax audits and so on. Before these other methods are considered in detail some time will be spent examining the results of various attempts to use monetary indicators to estimate the size of the black economy.
The last two chapters have examined various monetary approaches to measuring the size of the black economy, and have also surveyed some of the results of research using these approaches. Monetary approaches have been by far the most popular methods used in assessing the extent of black-economy activity. The principal reasons for this are (i) that monetary statistics are readily available and, (ii) a strong presumption in the literature that cash is the modus operandiof the black economy. However, other direct and indirect methods of assessment have been developed and it is the purpose of this chapter to review some of these alternative techniques. This chapter will concentrate on the indirect methods. (Direct methods, using tax audits, were briefly examined in Chapter 1).
Chapters 2–4 considered in detail the question ‘How large is the black economy?’ As we saw that is not an easy question to answer. Indeed, some people might argue quite legitimately that it is impossible to answer that question. This has not deterred some economists from trying to do so and they have developed a whole range of techniques aimed at revealing the extent of such concealed economic activity. These techniques, and some of the studies using them, were extensively reviewed in Chapters 2, 3 and 4. It is clear from that review that there are significant weaknesses with all the methods that have so far been devised. However, despite their imperfections these studies do constitute possibly the best evidence of the existence and growth of irregular economic activity. As Cowell (1985b) has claimed, ‘there is sufficient evidence to suggest that tax evasion is quantitatively a non-neglible problem in advanced Western-style economies’ (p. 163).
Chapter 5 showed that on the whole economic theory cannot provide totally unambiguous predictions concerning the effects of many of the factors thought to influence involvement in the black economy. Even if it could do so, the design of policy towards tax evasion requires more than just qualitative predictions. It requires precise estimates of elasticities and these can only be obtained by rigorous empirical testing. However, whilst there is now a healthy and growing literature concerned with the theoretical modelling of tax evasion, the number of empirical studies aimed at testing these models is still few indeed.
So far two major issues have been examined. First, how large is the black economy? and second, what leads people to become involved in the black economy? It should be clear that economists have invested a great deal of effort to answering these questions. This chapter looks at the consequences of such illicit activity. So far, this is an area of the subject that has received much less attention, but there are signs that this may be changing.
The discussion in Chapter 7 provides a weak case for claiming that tax evasion is, on balance, probably a bad thing. Whilst there have been few detailed studies of the effects of tax evasion, there is some evidence that it imposes quite substantial welfare costs upon society.
There is an infamous quip that ‘if all the economists in the world were laid end to end they still wouldn’t reach a conclusion’. Whilst this is no doubt intended to be a humorous remark it does have a serious edge. Economists, as a group, seem to be naturally disputatious. No sooner does someone come up with a new theoretical result or some new evidence than it is immediately challenged. In recent years outsiders must have been puzzled to hear of some of the arguments between economists over macroeconomic policy, for example. Of course, the researches of economists into aspects of the black economy and tax evasion are much less in the public gaze. However, the disagreements are almost as widespread. Much more importantly, research into the economics of tax evasion is still in its infancy. There is much to be done, too many areas about which we know too little for us to produce unequivocal conclusions. To pretend otherwise would be a grave disservice to both the general public and the economics profession. I hope, therefore, that I can be forgiven for producing only a few rather inconclusive comments on the economics of tax evasion by way of a conclusion. It seems natural to arrange these remarks in the same way as the structure of the book.
