Tax burden causes underground economy to rise 8,7% in 2007


Source: Diário do Nordeste, 18/04/2008

While the formal economy grew 5,4% last year, the underground grew 8,7%, according to a survey conducted by the Brazilian Institute of Economics of the Getúlio Vargas Foundation (Ibre / FGV) in partnership with the Brazilian Institute of Ethics in Competition (Etco) . The indicator was launched yesterday in São Paulo.

The new index deserves an explanation: ´The underground economy is different from the informal economy. It is broader, measuring the production of goods and services carried out, not reported to the Government, with the objective of evading taxes or social security contributions, and also without complying with labor regulations, ”explains economist Fernando de Holanda Barbosa Filho , researcher and professor at the foundation.

Considered residual, the underground economy did not attract attention initially. Some studies, however, have been showing that it could be bigger than imagined. More common in less developed countries, the shadow economy can grow alongside the formal economy or, conversely, when it goes bad.

´The two economies interact in purchases. When there is more income in the formal economy, spending on goods and services increases, be they formal or informal ”, argues Barbosa Filho. As a result, sales increase without taxes or charges, which distorts official statistics, increases rates for those who pay their taxes on time and implies unfair competition.

The underground economy, according to him, is the result of the high tax burden and rigidity of the labor market, which make it difficult and more expensive to formally hire in the labor market, for example. "A highly regulated economy stimulates the growth of the underground economy, which is flexible and therefore responds more quickly". He attributes this expansion to corruption as well, since there is less risk of legal consequences.

The drop in export activity in the last year would be another factor contributing to the increase in the new index. To commercialize in the international market, companies need to be completely up to date with their documentation, due to the high bureaucracy.

The underground economy is wide, ranging from the lady who makes cakes at home to the smuggler. Apart from official statistics, it needed to be measured by its 'infrastructure'. One of them is informality in the labor market, an easily accessible index, calculated by the Brazilian Institute of Geography and Statistics (IBGE). Another is the amount of money that each Brazilian carries with them: the higher the amount with which the person circulates and the lower the deposit in the current account, the greater the probability that the amount will come from a non-formal activity. 

Tax burden causes underground economy to rise 8,7% in 2007