The Comparison of the Shadow Economy in Turkey and European Countries

The Comparison of the Shadow Economy in Turkey and European Countries

Coskun Karaca (Cumhuriyet University, Turkey)
Copyright: © 2016 |Pages: 33
DOI: 10.4018/978-1-4666-8729-5.ch004
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As informal activities are considered as a crime, that kind of activities are being carried out secretly and their detection is difficult in most cases. Along with difficulties in determining the size of informal economy exactly, recently developed models and opportunities to reach reliable data enable making realistic estimations in regard to shadow economy. This study benefits from 11 different studies estimating informality in European countries and Turkey by using physical input, currency demand, DYMIMIC, and MIMIC methods. Common conclusion acquired from these studies is that informality rate in Turkey is higher than EU15 countries and EU13 countries –except for Hungary, Cyprus, Latvia, Croatia and Bulgaria. In addition to the comparison of these data, the reasons of the emergence of informal economy, measuring methods, and policy proposals in order to hamper informality in Turkey are also discussed.
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Part 1: Introduction

Shadow economy is known as income-generating economic activities disregarded from calculations while estimating national income accounts. Defining with all its units, shadow economy is economic transactions and activities that are not chained officially, non-certified by legal documents, unsupervised by public authorities, and disregarded in national income calculations (Ozsoylu, 1996, p. 10; Schneider, 1986, p. 644; Feige, 1989, p. 15-17; Onder, 2011, p. 242).

Since informal economic activities are stemming from income, asset and spending transactions, taxes required to be collected from these transactions are also unregistered. Therefore, shadow economy in regards with taxes can be defined as activities causing income loss for a state by means of unrecorded taxable activities of person and entities. From this aspect, informal economic activities in a state can be expressed as sum of undeclared transactions which are actually ratable (Aktan and Savasan, 2009, p. 11).

It is possible to reveal how shadow economy emerges within a country by the items composing national income. As is known, national income calculations include wages received by employees, profits received by entrepreneurs, rents received by landowners, and the interests received by investors. Had the employees, entrepreneurs, landowners, and investors obtained their shares from national income as recorded and expended their income for assets or consumption by registering it, there would not be presence of shadow economy. However, unregistered income from one or more of these activities consequently brings out shadow economy.

If it is considered from wages received by employees, there is no possibility of informality for public servants; however, it might exist for private sector in some cases. For instance, on such an occasion that an employee was not registered by the employer, both the tax and social security contribution would be excluded from GDP and the national income would be calculated under its actual value. In case some part of the wage was paid via banking and the rest was unregistered, than the amount of the wage subjected to banking would be recorded for tax and social security contribution. Likewise, an investor’s profit might be unregistered, unless it is declared. Again, both landowners’ rents and investors’ interests may be unrecorded. Nevertheless, in comparison with landowners’, it is harder for investors to keep their income unrecorded; because interest income are largely transacted by banks and financial institutions by which the taxes are already be collected before the income reach their owners. Informality in rental income, on the other hand, emerges in such an occasion that property owners gain rental income, although they do not declare it to the tax departments.

Besides, it is possible to register an unrecorded income in subsequent stages. For example, informality emerges when an entrepreneur do not declare his/her profits to the tax offices. In case of this unregistered profit is paid as wage to a worker, the wage income also stays unrecorded. However, if this money, which is not subjected to the national income calculations, was invested in any bank by a worker, than interest income would no longer be unregistered, but would be less reflected to the national income with reference to profit and wage income (Egilmez, 2012).

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