Tax evasion causes government to lose revenue, and in turn aggravates any public debt situation. However, whether it can be asserted that tax evasion is the major cause of the major debt situations such as the one going in Europe, in my opinion, is quite debatable.
To begin with, it would be an over simplification to derive the loss of revenue by multiplying together the size of shadow economy and the average tax rate, which assumes that the “shadow” transactions would have happened anyway even if they had been taxed upon. With taxes as added transaction costs, I find such an assumption hard to hold. The record industry sometimes likes to multiply the number of illegal downloads with the price of some copyrighted works, and go “ta-da, that’s how much money we’ve lost to piracy!” If that sounds absurd, well, it’s just as absurd in the tax revenue scenario.
I’m also not convinced that, had the European governments suffered less tax losses, they would not be in these debt situations now. Sure, if somehow some alien super-beings suddenly showed up now, miraculously recovered a couple trillions of lost tax revenue, and dropped it right into the Europeans’ collective laps, yeah, it would help tremendously. But that is different from if they had the however many trillions from the get go, because evidently their politicians didn’t go by “don’t spend the Euro you don’t have” – or they wouldn’t have driven these countries into deep debts in the first place. The game they have been playing is more like “spend x percent of GDP/tax revenue/future tax revenue”, where x seems to always get bigger and bigger and eventually over 100. So I’m not sure it would have been different now, had they had those extra trillions. They would more likely have spent it all anyway, and then some.
On a side note, this report puts China’s shadow economy size at 12% of GDP. For a country where cash transactions still absolutely dominate the economy, I somehow find that hard to believe.
fedsneighbor 