1 – Shadow Economies 2015
Lithuania, Latvia, Estonia, Poland, Sweden, Belarus
BSSB.BE 4liberty.eu/ 15.12.2015
The aim of this publication is to present and analyze the results of representative population surveys on public perceptions of the shadow economy and actual engagement in shadow economic activities that was conducted in six countries, including Lithuania, Latvia, Estonia, Poland, Sweden and Belarus, in May-June 2015.
The survey data and other sources of evidence were used to investigate the drivers of the shadow economy and to draw some policy recommendations. The shadow economy can generally be defined as economic activities (goods produced and services rendered) conducted in non-compliance with applicable laws for the purpose of avoiding taxes/or and regulations.
If the goal is to effectively tackle the issue of the shadow economy, it is crucial to view the shadow economy not only as a criminal offence, but also to recognize that the shadow economy is primarily about economic activities that create value.
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1.Likelihood of being detected and perception of punishment
Before identifying the causes of the shadow economy or offering any specific cure, it is important to understand public perceptions about shadow activities. Without this knowledge, even the most carefully thought-out measures may become useless and fail to achieve the desired result. Research reveals that the size of the shadow economy in a country is highly dependent on the tax morality of its residents, which in turn is determined by public perceptions and attitudes.
Perception of likelihood of detection
People sometimes engage in shadow activities. They get part of or their entire wages “in an envelope” (or “under the table”) or buy goods or services from people who do not pay taxes. People who engage in such activities risk disclosure, fines or additional tax bills from the authorities. Respondents were asked about their perceptions of the likelihood of detection.
All three Baltic States show very similar tendencies. The share of people who see the likelihood of detection as high varies from 39% in Latvia to 43% in Lithuania, and there is a higher share of those who consider the risk to be very or quite low, from 54% in Estonia to 57% in Latvia. Belarus has a similar share of those who consider the likelihood of detection to be high or low, 46% and 51% respectively.
Likelihood of being detected purchasing a good or a service from an illegal source that is not registered and does not pay taxes
Sweden once again accounts for the highest perceived likelihood of detection for purchases of goods or services from an illegal source that is not registered and does not pay taxes. As many as seven in ten believe the likelihood to be very or quite high, compared to only a fifth of the respondents who perceive it as quite or very low.
This is yet again the only country with an overwhelming majority of such opinions. Lithuania, on the other hand, displays a completely different distribution, with 78% of respondents perceiving the likelihood of being caught as quite or very low, compared to only 21% of those who see it as quite or very high.
Belarus comes second after Sweden in terms of perceived high likelihood of being caught purchasing from illegal sources. However, this view does not reach a majority and accounts for 46% of all the responses.
The share of those who perceive the likelihood to be quite or very low is 53%. Poland shares a similar distribution of answers with Belarus. In Poland 42% of respondents perceive the likelihood of being caught as very or quite high, compared to 52% of those who see it as quite or very low. Contrary to Poland, Latvia and Estonia seem to be closer to Lithuania with their majorities (69% and 65% respectively) leaning towards a low likelihood of being caught purchasing from an illegal source.
In all three Baltic states respondents think that the likelihood of being detected purchasing goods or services from an illegal source that is not registered or does not pay taxes is lower than while working without a legal employment contract or getting at least part of the wage as an “envelope wage”.
The reasons for this can be manifold. First, there is a lack of perceived liability. Once a person is caught purchasing something illegally, it might be difficult to prove that he or she did know the fact. While the provider of illegal goods or services might be detected during a regular check, a customer can simply pretend that he or she was unaware that the source was not registered or was not paying taxes. After all, it is difficult to determine whether a seller has been declaring his or her income.
Perception of punishment
When thinking about peoples’ incentives to engage in shadow economy activities, it is important to investigate not only the perception of likelihood of being detected but also the perceived punishment once a person is caught. Respondents were asked how severe they believed the punishment would be if they were caught engaging in shadow economy activities, such as getting part of or the entire wage “in an envelope” (or “under the table”) or buying goods or services from people who do not pay taxes.
Perception of punishment for working without a legal job contract or getting at least part of the wage as an “envelope wage”
Punishment for working in the shadow labour market is perceived to be the most severe in Lithuania, the only of the six surveyed countries where the majority of respondents qualify this punishment as very or quite severe (55%).
A total of 38% of the respondents see it as quite or very mild. Belarus also comes close concerning the severity of punishment as one in two of the respondents say the punishment is very or quite severe. The percentage of those who consider it to be very or quite mild is 46%.
The distributions of answers for Latvia, Poland and Estonia are also quite similar. Yet, the majority is not reached in any of these groups. A total of 45% of respondents in Latvia, 41% in Poland and 40% in Estonia consider the punishment to be very or quite severe, compared to 43%, 46% and 47%, respectively, who see it as quite or very mild. In Sweden, on the other hand, the majority (60%) believe the punishment to be quite or very mild, compared to only 26% who think otherwise.
*This is the first part of the article about Shadow Economies in the Baltic Sea Region 2015. More information You will find in the next part of the article