Tax gap in the global economy
| Published date | 01 October 2018 |
| Pages | 567-583 |
| Date | 01 October 2018 |
| DOI | https://doi.org/10.1108/JMLC-12-2017-0072 |
| Author | Konrad Raczkowski,Bogdan Mróz |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation,Financial crime |
Tax gap in the global economy
Konrad Raczkowski
University of Social Sciences, Warsaw, Poland, and
Bogdan Mr
oz
Warsaw School of Economics, Warsaw, Poland
Abstract
Purpose –The purpose of this paper is to present an up-to-date estimation of the tax gaps (TGs) of 35
countries (28 EU memberstates and 7 additional countries –Australia, Canada, Japan, New Zealand,Turkey,
Switzerland and the USA, both as a percentage of the gross domestic product(GDP) and a nominal value (in
US$).
Design/methodology/approach –The authors’empirical study was carried out on 35 selected
countries. To estimate the TG, indirect methodology has been applied, where the basic components used in
the estimation procedureare the level of the shadow economy estimated with the multiple indicators multiple
causes method, the GDP at currentprices (in US$), the total tax rate (TTR) of a given country and the indirect
method offollow-up and estimation of lacking data.
Findings –The basic finding of the research is that the level of the TG is determined individually for a
given country and is stronglycorrelated with the GDP, i.e. if the GDP is high, the TG as the percentage of the
GDP is lower in the majorityof countries. It is particularly easily noticeable in countriessuch as the USA (TG
–3.8 per cent of the GDP), the Great Britain (TG –3.2 per cent of the GDP) or Japan (TG –4.3 per cent of the
GDP).
Research limitations/implications –A limitation of the adopted research method is the lack of
application of direct (supplementary) methods which would include potentially lost contributions from
foreign sources and not registeredtaxpayers. Another research constraint is that the authors’estimationsdo
not take into account the so-called direct top-downapproach based on the VAT Theoretical Total Liability.
The weakness of the adopted procedure of estimation is also the use of TTR only instead of comparative
approachincluding tax burdens and average tax rate.
Practical implications –TG has recently become a hotlydebated issue and poses a big challenge to the
public finance in many countries. The paper providessome recommendations for the policymakers how to
reduce the size of the TG.
Social implications –Tax evasion and tax avoidance leadingto the emergence and expansion of the TG
erode the businessethics and distort the rules of fair competition, thus undermining the socialtrust and moral
infrastructureof business transactions.
Originality/value –One of the major research findings is that 30 per centof the TG in a given country is
determinedby the TTR, which–for the first time –provides empirical proof that tax policy(as part of overall
economicpolicy) plays an important role and that it may determine the fiscal effectivenessof a givencountry.
Keywords Tax evasion, Tax gap, Shadow economy, Global economy, Tax avoidance
Paper type Research paper
1. Introduction
Tax gap (TG) is part and parcel of any economy. To a larger or a smaller extent,the shadow
economy operates in every country, flourishing because of tax evasion and persistent
practices of aggressive tax optimization. Simultaneously, no tax administration has so far
developed a universal methodology for calculating the TG, which could be applied in
JEL classification –H26, H87, H3
Tax gap in the
global
economy
567
Journalof Money Laundering
Control
Vol.21 No. 4, 2018
pp. 567-583
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-12-2017-0072
The current issue and full text archive of this journal is available on Emerald Insight at:
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another country and which would show how imperfect a given country is in terms of
contributions of public levies, or how dangerous this is to the fiscal as well as socio-
economic policy. Therefore,the present article mainly aims to answer the question: What is
the size of the TG in 35 countries which are partof the global economy?
The TG –understood as the difference between due taxes which the taxpayers should
have paid within a specified period of time and the amount of tax that has actually been
contributed to the state budget (Gemmell and Hasseldine, 2012,p.2;George, 2012)–has
always been and will remain an inextricable element of any economy. The key role in
reducing the TG is played by tax administration of a given country, which may work
efficiently by way of supporting the processes of formulation of the tax and economic
policies as well as risk analyses, tax audits or operational controls over business activity
(O’Doherty, 2014).
As long as the level of the TG oscillates around acceptable boundaries –i.e. ones that
allow to consider the existenceof a small portion of the shadow economy to be a stimulus for
economic growth or a self-contained way of generating income by a taxpayer, which is
subsequently redistributed in the official economy –there is no apparent reason to combat
tax-evasion and related practices. Of course, we are talking about the semi-legal shadow
economy and not the one which is typically illegal and often constitutes a threat to peoples’
lives and health (Raczkowski,2013, pp. 347-363). A problem arises if the boundary is crossed
and the level of the shadow economy becomes unacceptable from the perspective of
collecting budget revenues, when it creates unfair competition which makes profitable
business activity impossible without resorting to some form of unofficial business (Mr
oz,
2002,2012). That is why it is so vital to be able to estimate the TG so that it may serve as
some sort of control measure in the process of public governance, which would allow to
perform analyses and take countermeasures to safeguard the State Treasury’sfinancial
interest. The size –and in particular growth –of the TG is also a signal that the socio-
economic policy is erroneous and must be fixed so that business activity can regain its
economic and legal character. The TG exceeding the tolerable threshold (around 5 per cent
of the gross domestic product [GDP]) always exerts someinfluence over such application of
production factors that is not aligned with the requirements of possible sustainable
development even if it may contribute to the economic growth. It must also be noted that
informal economic activity is present in both developing and developed countries
(Schneider, 2002;Mr
oz, 2002;Schneider et al.,2010;Kuhen, 2014). At the same time, the TG
itself may emerge and develop, if there are mechanisms allowing this to happen. Such
mechanisms are created in a given countryby the government, by criminal organizations or
by entrepreneurs. They may be created by way of mutual cooperation between corrupted
government officials and criminals, the government officials and entrepreneurs, or
entrepreneurs and criminals or among the corrupted government’s representatives,
entrepreneurs and criminalssimultaneously –of course dominated by one decisive group at
a given time. From time to time such mechanisms may be created jointly as it pays off for
everyone. An example of this may be tax havens,otherwise known as secrecy jurisdictions,
which offer legal regulations on guarding the financial secrets of people who keep their
money in such jurisdictionsbut reside someplace else. Tax jurisdictions whosebeneficiaries
are the largest economies in the world cause countries such as Switzerland, Luxembourg,
Hong Kong, the Cayman Islands,Singapore, the USA, Lebanon, Germany, Jersey or Japan to
be considered the leadingfacilitators of tax evasion (Cobham et al.,2015,pp. 281-303).
Research carried out by Hashimzade et al. (2013, pp. 941-977) shows that the non-
expected utility theory explains that taxpayers do not make decisions based on objective
probabilities in the process of tax evasion. It might be stated that they observe and
JMLC
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