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Taxation and the shadow economy : how the tax system can stimulate and enforce the formalization of business activities

Author

Listed:
  • Awasthi,Rajul
  • Engelschalk,Michael

Abstract

Cash transactions for goods and services in which no receipts are issued greatly increase the risk of tax evasion. Despite the availability of banking services and alternative payment, key sectors of the economy remain largely cash-based in almost all developing countries. This paper shows the apparent strong negative correlation between the use of electronic or formal payments and the size of the shadow economy and reviews the approaches used by tax policy makers and administrators to achieve better control of cash transactions. It argues that the many new and sometimes innovative approaches developed to support the formalization of cash transactions will have little impact on the shadow economy if applied in isolation. A successful strategy to tax cash economy businesses and transactions requires a holistic approach to compliance management in which traditional monitoring and enforcement tools, such as enabling tax administrations to access taxpayer data and match information from various public and private sources, play a key role.

Suggested Citation

  • Awasthi,Rajul & Engelschalk,Michael, 2018. "Taxation and the shadow economy : how the tax system can stimulate and enforce the formalization of business activities," Policy Research Working Paper Series 8391, The World Bank.
    • Handle: RePEc:wbk:wbrwps:8391
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    Citations

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    Cited by:

    1. Das, Satadru & Gadenne, Lucie & Nandi, Tushar & Warwick, Ross, 2023. "Does going cashless make you tax-rich? Evidence from India’s demonetization experiment," Journal of Public Economics, Elsevier, vol. 224(C).
    2. Ligita Gasparėnienė & Rita Remeikienė & Colin C. Williams, 2022. "Unemployment and the Informal Economy," SpringerBriefs in Economics, Springer, number 978-3-030-96687-4, April.
    3. Eun Young Oh & Shuonan Zhang, 2022. "Informal economy and central bank digital currency," Economic Inquiry, Western Economic Association International, vol. 60(4), pages 1520-1539, October.
    4. Ligita Gasparėnienė & Rita Remeikienė & Colin C. Williams, 2022. "Theorizing the Informal Economy," SpringerBriefs in Economics, in: Unemployment and the Informal Economy, chapter 0, pages 7-60, Springer.
    5. Das, S & Gadenne, L & Nandi, T & Warwick, R, 2022. "Does going cashless make you tax-rich? Evidence from India’s demonetization experiment," CAGE Online Working Paper Series 605, Competitive Advantage in the Global Economy (CAGE).
    6. Ruch,Franz Ulrich, 2020. "Policy Challenges for Emerging and Developing Economies : Lessons from the Past Decade," Policy Research Working Paper Series 9180, The World Bank.
    7. Canh Phuc Nguyen & Binh Quang Nguyen, 2023. "Does the shadow economy matter for tourism consumption? New global evidence," Empirical Economics, Springer, vol. 65(2), pages 729-773, August.
    8. Nguyen, Canh Phuc, 2022. "Does economic complexity matter for the shadow economy?," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 210-227.
    9. Cordelia Onyinyechi Omodero, 2020. "Taxation Income, Graft and Informal Sector Operations in Nigeria in Relation to Other African Countries," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(2), pages 163-172, April.
    10. Emmanuel Umoru Haruna & Usman Alhassan, 2022. "Does digitalization limit the proliferation of the shadow economy in African countries? An in‐depth panel analysis," African Development Review, African Development Bank, vol. 34(S1), pages 34-62, July.
    11. Ishak, Phoebe W. & Farzanegan, Mohammad Reza, 2020. "The impact of declining oil rents on tax revenues: Does the shadow economy matter?," Energy Economics, Elsevier, vol. 92(C).
    12. Sacchi Agnese & Santolini Raffaella & Schneider Friedrich, 2022. "On the effects of e-participation on shadow economy: a worldwide empirical analysis," German Economic Review, De Gruyter, vol. 23(3), pages 463-491, August.
    13. Omodero Cordelia Onyinyechi, 2019. "The Consequences of Shadow Economy and Corruption on Tax Revenue Performance in Nigeria," Studia Universitatis „Vasile Goldis” Arad – Economics Series, Sciendo, vol. 29(3), pages 64-79, September.
    14. Hailin Chen & Friedrich Schneider & Qunli Sun, 2020. "Measuring the size of the shadow economy in 30 provinces of China over 1995–2016: The MIMIC approach," Pacific Economic Review, Wiley Blackwell, vol. 25(3), pages 427-453, August.

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