Harnessing the shadow economy

"Where do billions of dollars go when they never show up on anyones books?" This is the tight spot alarming most of the economies worldwide. From drug dealing to freelance writing, there are millions of businesses that are off the record because they are usually carried out in exchange for cash instead of routing through banking channels, thus allowing them to evade taxes.
According to a World Bank report, 30 percent of the people working in Eastern Europe are part of this "Shadow economy" and amongst the Eastern European states, Bulgaria peaks the black list with the black economy accounting for 32 percent of the GDP in 2012.
This is followed by Romania (29 percent), Lithuania (28.5 percent) and Estonia (28.2 percent). Austria and Switzerland are on the other side of the scale with shadow economy accounting for 7.9 percent and 7.8 percent of their GDP, respectively.
In the face of the Euro crisis, labour force shrinkage and population ageing, the trend of shadow economy is so rife that it is challenging the regions long-term growth potential.
With a growing proportion of the informal economy in Eastern Europe, government tax revenues are worsening in the region. Further, in the presence of a large informal sector, the economic indicators tend to become unreliable, posing difficulties to the governments in framing macroeconomic policies.
One of the foremost reasons leading to this black economy is the enhanced tax burden. The bigger the disparity between the total cost of labour in the official economy and the after-tax earnings (from work), the greater is the incentive to avoid this difference and to work in the shadow economy.
Other reasons include social security issues and intensity of regulations (often measured in the numbers of laws and regulations). In Bulgaria, particularly, people don covet to revert back to the formal business channels, because of the high Formalisation Tax Rate (FTR). This means that in Bulgaria, single persons with no children who earn less than the minimum wage in the informal sector have to give up 50-70 percent of their income to formalise.
In contrast to that, in Australia and the United States, the FTR peaks at a much lower fraction of the average wage - around 40 percent in Australia and 30 percent in the United States.
To curb the unofficial, untaxed and unregulated work, World Bank proposes a set of policy initiatives. These measures include friendlier tax system coupled with viable social and employment protection. Moreover, the concerned states need to devise social benefits that reward formal work. Precisely speaking, building trust in the government is a key solution to rein in the gloom of the black economy.