We cannot let the underground economy grow again


Evandro Guimaraes


Each year, a volume of money almost equal to the sum of GDP in Rio de Janeiro and Minas Gerais changes hands in Brazil through informal economic activities. It evades inspection, puts consumers' health at risk, pays no taxes and disrupts the businesses of companies that act within the law. The underground economy represents one of the greatest challenges for the growth of the economy and the fair distribution of its benefits among the entire population.

Although in recent years Brazil has managed to advance in the fight against this evil, there is still a long way to go. Statistics show that, after a decade of continuous reduction, informality has parked at 16% of GDP. Just stopping decreasing is a dangerous sign. Even more worrying is to imagine the possibility of a setback in the levels of business formalization, common in times of economic crisis and tax increases like the current one. If we Brazilians intend to resolve the obstacles that hinder the development of the economy in a vigorous and lasting way, avoiding this risk is an inexorable mission.

To fight effectively, you need to understand the problem first. The underground economy is not an exclusive feature of Brazil and its causes and consequences have already been well studied. An important part of businesses that hide from the light is related to criminal activities. Smuggling, drug trafficking, cargo theft, counterfeiting of products and piracy are the main sources of illicit resources in the hold of the economy. For these activities, the only acceptable solution is the fierce and persistent combat, with inspection, policing and punishment of those involved.

There is, however, a part of informality that does not involve criminal actions, but it does not fail to cause serious consequences for the country and the population, especially the poorest. It is embodied in attitudes such as that of the doctor who charges cheaper for an appointment without a receipt, of the property owner who does not declare income from rent, of the industry that produces without proper licenses, of the company that imports under-invoiced products, of the merchant who does not declare its sales.

This type of informality encourages opportunistic behaviors, creates an environment of violation of the rules and, with this, reduces the quality of investments in the country. In addition, it harms public finances by withdrawing government resources that could be used for social programs and infrastructure projects.

From the collection point of view, it is easy to calculate the size of the loss. Last year, the underground economy moved around R $ 830 billion in Brazil without paying tax. Considering that the Brazilian tax burden is around 37% of GDP, it can be deduced that the country stopped collecting in just 12 months more than R $ 300 billion in taxes, equivalent to 12 years of Bolsa Família or 23 years of public funding for higher education, FIES.

But informality also hinders the development of the productive sector and the country. When a company has to face competitors that do not comply with rules or pay taxes, it loses confidence and stops investing in more modern and efficient factories. Productivity falls, the country loses competitiveness and growth is compromised.

Since 2003, the ETCO-Brazilian Institute of Ethical Competition and the Brazilian Institute of Economics of the Getúlio Vargas Foundation in Rio de Janeiro have conducted an annual survey on the size of the informal economy in the country, expressed through the Underground Economy Index (IES). During this period, there was a significant advance in the reduction of this index, which fell from 21% of GDP in 2003 to 16,1% in 2014. The progress was due to a set of factors, such as the expansion of credit, which demanded greater formality; improvements in the collection systems, such as the creation of the Electronic Invoice, which had a great effort by ETCO; tax substitution systems, in which the tax started to be collected in the main phase of the production and consumption chain; initiatives such as the National Family Agriculture Strengthening Program (Pronaf), the Simples tax regime and the institution of the figure of the Individual Microentrepreneur (MEI); the increase in public investment in education, which contributes to the reduction of informality in the labor market.

Yes, we have moved forward, but we cannot be satisfied. We must continue efforts to incorporate a volume of resources into GDP that is greater than everything that a country like Israel produces each year. The timing is crucial. In the index released last year, the shadow economy declined by just 0,1%, and since then macroeconomic conditions have deteriorated. The economy has slowed down, credit has declined, the government has reversed its policy of exemption and has been insisting on the path of increasing taxes to achieve balance in its finances.

Several studies have already shown that the moments of economic crisis and fiscal austerity bring the increase in clandestinity in tow, when people or companies affected by the crisis try to compensate their losses by fleeing their tax obligations. It is at this time that the country needs to choose the direction it intends to take: whether that of complacency with the illegal or that of compliance with the rules. One chooses the easy shortcut to further increase the tax burden of those who act within the law or take the most difficult path by engendering the necessary reforms to reduce informality and increase the taxpayer base.

The recipe for combating the shadow economy is well known. An effective ingredient is tax breaks, which diminish the advantage of tax evaders. Another measure with a proven effect is tax simplification. A World Bank survey shows that medium-sized Brazilian companies spend 2.600 hours a year to take care of all the tax bureaucracy, compared to just 620 hours of the South American average. In the information and technology age, it is not acceptable wasting our energy on useless and repetitive tasks. It is time to carry out the long-awaited tax simplification for all business segments.

Strengthening enforcement is certainly another effective initiative. We can no longer tolerate, for example, pirated or smuggled products being sold in broad daylight at noble and well-known addresses in major cities. This explicit illegality is a mockery of citizens and companies that act within the law.

Last but not least, we have to honor, support, publicize and value public policies or initiatives of any kind that allow an effective fight against counterfeiting, adulteration of products, sophisticated smuggling, such as importation through sub-invoicing. It is necessary to honor efforts, ideas and valuation movements of those who manufacture safe products for the consumer and collect the taxes due. Only then will we be able to build a richer and fairer country for all.


* Evandro Guimarães is president of ETCO-Brazilian Institute of Competition Ethics