Source: Valor Econômico - - EU & INVESTIMENTOS - 13/08/2009

“Underground Economy” - Vito Tanzi, Friedrich Schneider, Fernando de Holanda Barbosa Filho.

Campus / Elsevier. Price to be defined

Underground, informal, illegal economy. Whatever the name given to the phenomenon or to the conceptual differences of each, the fact is that there is a fraction of society in all parts of the world that lives outside the institutions and the legal system. They are citizens or companies that shy away from paying taxes, obligations, over-regulation, or that harbor the product of corruption in this black market. It has been a great challenge for economists since the 1970s to measure the extent of this practice, its damage to the market economy and competition and to understand the reasons that induce a part of the economic system to live in marginality.

The book “Subterranean Economy” brings together three articles by experts on the subject to make a contemporary radiography of informal activity in Central and South America.

Vito Tanzi, a senior consultant at the Inter-American Development Bank, a respected tax policy expert, writes about “The underground economy, its causes and consequences”. Friedrich Schneider, a professor at Johannes Kepler University (Austria), is an authority on underground economics and deals with the “Informal economy in Latin America”, focusing mainly on Brazil and Colombia. The third article is by Fernando de Holanda Barbosa Filho, from the Brazilian Institute of Economics (Ibre), who applies the MIMIC (Multiple Indicators, Multiple Causes) method to estimate the extent of the underground economy in Brazil, which, according to him, has grown almost 10 % between 2003 and 2006.

Schneider estimates that the shadow economy in the region is around 41% of GDP. The increase in tax and social security charges would be among the main causes - in addition to over-regulation, unemployment, perception of corruption in society and rigidity in the labor market. Brazil, says Schneider, is the country with the most stringent legislation in labor relations, followed by Mexico and Argentina.

The complexity of the legislation and the excess of accessory obligations are an invitation to the expansion of the informal market. Tanzi recalls that in 1913, when the government introduced income tax legislation in the United States, laws and regulations spanned 400 pages. In 2006, there were 65 thousand pages and there were already 600 different forms of forms.

Estimates for the 21 countries surveyed were made at six different times, from 1999/2000 to 2005/2006.

In Brazil, underground activity represented around 39,8% of GDP in the first period, rose to 42,3% in 2002/2003 and in the last period it dropped to 39,4%. In Bolivia, this activity would represent something like 67,2% of GDP. In Chile, it is 18,5%, the lowest incidence in the region. Costa Rica (26,3%) and Argentina (27,2%) follow.

The preface is signed by Everardo Maciel, former secretary of the Federal Revenue and currently a tax consultant. Maciel not only summarizes the three studies, but punctuates the discussion with several questions. Schneider, for example, considers that indirect taxes are a relevant cause of the underground economy in Brazil and Colombia. Maciel asks if it is possible to make a clear segregation between direct and indirect taxation. It does not agree with the view that in Brazil the high costs of compliance for the taxpayer induce them to informality and raises, as an alternative hypothesis, the excessive constitutionalization of the national tax system - a process that leads to the “judicialization” of the matter and to the increase in costs companies.

The subject is undoubtedly complex and economists are still groping in their study. But Tanzi does not consider that inaccuracies and difficulties are grounds for disbelief in the progress of the debate. "It is better to be vaguely right than precisely wrong," says the economist, who has been with the IMF for many years, quoting Keynes.