10 May 2010

Evasive action

Marginal Revolution | Tyler Cowen | Facts about Europe
The country in Europe with the biggest untaxed, or “shadow,” economy as a proportion of GDP is Greece. Next is (gulp) Italy. Then Portugal and Spain. On the chart below, in fact, the bars look unsettlingly like dominoes.
There is more information and a good chart here. There is this too:
Massive tax evasion helps produce large public-sector deficits.
"Helps produce," sure. But it's neither necessary nor sufficient. If there was no tax evasion but everything else stayed the same you could significantly reduce deficits. But when does everything else stay the same?

Say you have a widget factory, and there's a five percent inefficiency in your process so you can produce 95 one-pound widgets for every 100 lbs of supplies.* This 5% inefficiency has always been there and appears that it always will be.

(* I use the term "inefficiency" very loosely here.  Deal with it.)

You sign a contract to deliver 1000 widgets. Then you order 1000 lbs of supplies. Only 950 widgets come out of your factory, leaving you with a 5% deficit.  Does it make any sense to blame that deficit on the 5% inefficiency in your manufacturing process? Of course not. You should have accounted for that before promising to deliver 1000 widgets.

The Greeks, Italians, etc. have chronic tax evasion. They should be planning for that. They promised to deliver more government spending than they had government revenue. Period. It doesn't matter if revenue is short because of evasion or any other reason — their egos politicians wrote checks their body treasuries couldn't cash.

1 comment:

  1. Yeah, I never really understood the "if they all started paying what they really owed, we'd be fine" argument. The government had a long time to figure out what percentage of nominal taxes they were likely to actually receive (and also plenty of time to figure out how to get more revenue or cut spending if that was going to fall short).

    Acting all surprised that the forecasts of nearly 100% compliance didn't match the reality was disingenuous.