The shadow economy

Approach	Method
Measures (examples)
Deterrence (pursue and punish)	Improved detection	Data matching and sharing; Joined up strategy; Joint operations
	Increased penalties	Increased penalties for evasion
	Increase perception of risk	Advertising the penalties for informal working; Advertising the effectiveness of detection procedures
Enabling formalisation	Prevention (deter entry)	Simplification of compliance; Direct and indirect tax incentives; Smooth transition to self-employment; Introducing new categories of work; Micro-enterprise development
	Curative (encourage movement out of shadow economy)	Demand-side incentives (e.g. service vouchers; targeted direct taxes; targeted indirect taxes); Supply-side incentives (e.g. society-wide amnesties; voluntary disclosure; formalisation services)
	Fostering commitment (retain in the formal economy)	Promoting benefits of formal work; Education; Peer-to-peer surveillance; Tax fairness; Procedural justice; Redistributive justice

VIII. Tackling the shadow economy through deterrence measures.

8.1. Improved detection.

As noted above, deterrence measures can involve increasing penalties or increasing the likelihood of being caught. Measures to improve the perceived or actual likelihood of detection focus on two issues: increasing the effectiveness of inspections, and joining up strategy and operations, including data matching and sharing, either at the national or cross-national level.
Nearly ah tax authorities pursue initiatives to improve the effectiveness of inspections. These initiatives range from increasing the number of inspections through to improving the effectiveness of inspections in terms of, for example, the number of instances of shadow work identified and the value of the undeclared tax collected or sanctions imposed. To achieve this, administrations have, for instance, concentrated inspections on ‘suspect’ sectors where shadow work is rife. ‘Announced inspection visits’ have also been used, whereby a place and/or sector is informed that a visit is to occur in the near future. This has been done in sectors such as hotels and restaurants in countries such as Denmark. The pre-announcement of the visit can be expected to lead to a reduction in tax evasion without penalties being imposed.
Two other common approaches to improve the effectiveness of inspections have been to ensure that workers are registered prior to commencing work and the use of identity cards. In the past, it was commonly the case that, when an inspector visited a workplace, the owner would claim that the worker had just started that day and therefore had not yet been registered. To overcome this, many countries have now introduced the compulsory registration of workers before they start work. In nations such as Germany and Austria, moreover, customers (whether businesses or households) have been made liable for any instances of shadow work identified (see Williams and Renooy, 2009). These approaches are not without their disadvantages – for example, they may raise costs on businesses.
Identity cards may or may not work as a deterrent but they are a potential tool to facilitate detection of unregistered workers. Between August 2006 and December 2007 in Italy, the inspections of 37,129 construction sites revealed that 57 per cent of hrms were irregular and that 63 per cent of workers regularly employed on construction sites were unregistered (Ministero del Lavoro, della Salute e delle Politiche Sociali, 2008).
Identity cards have also been implemented voluntarily by the business sector in a bid to clean up their sector and stifle the shadow economy. In Sweden, for instance, the construction industry has implemented its own voluntary registration scheme, namely ID06, as described in the box.
The use of industry registration schemes, of course, circumvents the wider objections to and problems that might arise with government identity card systems.
To improve detection, another popular initiative is to enhance the coordination of strategy and operations, including data sharing. On the one hand, this has occurred on a national level, as exemplified by Belgium. On the other hand, there have also been limited attempts to achieve cross-national cooperation on data sharing, such as on the ownership of foreign bank accounts.