The shadow economy

Legitimising small-scale shadow work
Some 55 per cent of ah work in the shadow economy consists of small-scale intermittent work conducted for and by kin, neighbours, friends and acquaintances, often with a social or redistributive rationale (Williams, 2004a, 2006). For example, friends or kin are often paid on a cash-in-hand basis for doing some home improvement task (such as decorating) or child-minding as a way of providing them with some money in a manner that avoids any connotation of charity. Much of this could be legitimised overnight if it was decided that people could earn up to a certain amount each year tax-free and without declaration. This would also prevent governments from stifling active citizenship which it is so desperate to nurture in other policy realms.


Rich Aunt Agatha scheme, Netherlands
It is widely recognized that many start-ups in business secure their venture capital not from formal but from informal sources such as family, friends and acquaintances. A resulting problem is that these loans are often made on a relatively informal basis, which may contribute to an attitude from the outset that informal practices are part of the culture of the enterprise that is being established. Furthermore, contracts may not be enforceable and will often not be written down. In the Netherlands, this was recognized. As a result, a scheme called the Tante Agaath-Regeling ('Rich Aunt Agatha Arrangement') was introduced. This provides an incentive to those making loans and, in doing so, helps those using personal loans from family and friends (Aunt Agatha) to start off on the right footing. By exempting these private moneylenders from certain taxes, the intention is that, if such loans are put on to the radar screen of the tax authorities but still not taxable, it is more likely to encourage businesses to start off on a more formal basis rather than seeing themselves as being engaged in informal arrangements which might well carry over into everyday trading practices (Renooy et al., 2004; Williams, 2004d). So far as is known, no formal evaluation of this initiative appears to have been conducted.

In Slovenia, this was achieved by creating a simplified regula-tory environment for small jobs whereby supplementary personal work, such as tasks in the household, were deemed free of taxation and other levies to a certain extent. Given that it is similarly the case in many other countries that people often feel they have no option but to conduct such small jobs as undeclared work, owing not least to the perceived problems involved in declaring it, legitimising such work is one way forward. For the unemployed, meanwhile, participation in such endeavour could be covered by allowing them to include such earnings in an annual (rather than weekly) benefits disregard.

This approach of using ‘disregards’ does not only have to apply to small-scale work. It could also be used in respect of the provision of capital by family and friends to start up businesses. One example of this is a scheme in the Netherlands, described in the box, which allows family and friends to make loans to new businesses.
Tax and social security incentives to deter entry into the shadow economy, however, do not have to be provided solely by the state. Civil society, professional associations, trade bodies or businesses might also be able to assist the formalisation of the shadow economy, as was seen in Romania and is described in the following box.