Source: Intelog - Porto Alegre / RS - EDITORIAL - 25/07/2010

The State of São Paulo

In Brazil, the index that measures economic activity exercised outside the government's control - the underground economy, which does not pay taxes and thus competes unfairly with those who work according to legal standards - remains high when compared to the indexes industrialized countries, although in recent years it has been falling steadily, albeit slowly. This is the picture revealed by the most recent survey by the Getúlio Vargas Foundation (FGV), carried out at the request of the Brazilian Institute of Competitive Ethics (Etco), on activities that do not collect taxes in the country. With a new calculation methodology - based on data from the National Household Sample Survey on informal work, that is, without registration in the portfolio, and on estimates of monetary transaction values ​​that are not reported to the government, among other information -, the Brazilian Institute of Economics (Ibre), a FGV body that developed the new index, believes it has reached a much more reliable result on the underground economy in Brazil. The estimate is that, last year, the GDP of the “underground economy” reached 18,4% of the Brazilian GDP, or R $ 578 billion. This figure is higher than Argentina's GDP. Considering the current tax burden, it is possible to estimate the taxes that are no longer collected annually at R $ 200 billion. Tax-paying companies are disadvantaged as tax evaders can offer the same product at lower prices. It also loses the country, because informality creates a bad environment for business, which inhibits investments. The underground economy is defined by FGV as all production of goods and services not reported to the government in order not to pay taxes and duties in general, labor charges and other costs. It also includes activities that are downright illegal, such as selling stolen goods, smuggling, selling drugs, gambling, fraud and prostitution. The application of the new methodology to data from previous years shows a steady decline in the shadow economy. In 2003, when FGV made the first survey of this type of activity in Brazil, its volume was 21% of GDP. The current rate is much lower than that of other developing countries, in which it can reach 40% of GDP. Among the main factors that lead to the drop in the underground economy index, the person responsible for the FGV study, professor Fernando de Holanda Barbosa Filho, points out the growth and modernization of the formal economy. With the growth in production, the supply of credit also grows and, in order to have access to it, companies and workers need to prove that they are able to pay the installments, which encourages formalization. “GDP growth is a holy remedy”, noted Ibre director, Luiz Schymura. The modernization of the economy, in turn, improves the business environment, reduces bureaucratic requirements for the legalization of an enterprise, facilitates the collection of taxes and increases the efficiency of inspection and anti-evasion agencies. The technical director of Sebrae, Carlos Alberto dos Santos, recalls that the incentives for formalization provided for in the General Law on Micro and Small Companies and the creation of the figure of the individual entrepreneur also help to reduce the volume of the underground economy. "These normative advances are changing the face of the Brazilian economy," says Santos. "There are so many incentives that, within a few years, only those who work for themselves and earn very little sporadic income or those linked to illegal activities, such as piracy, will remain in the informal sector." But this will certainly not happen anytime soon. The decline in the volume of the shadow economy is still slow, never greater than 0,7% of GDP from one year to the next. For this reason, the Brazilian index is still much higher than the average of the countries that make up the OECD, of around 10% of GDP.