Evaluation of the Impact of Shadow Economy Factors: Ukrainian Case

Abstract

Unrecorded economy exists in all countries and, depending on its size, in one or another way influences country’s economic development, its social welfare and politics. Big scope of unrecorded economy impedes the efficiency of country’s legal and tax frameworks. Tax burden for recorded economy is increased while the participants of unrecorded economy evade taxes this way impoverishing the budget of the country. This article has been aimed at evaluation of the impact of shadow economy factors in Ukraine during the period of 2005 – 2012. The fact that the scope of shadow economy in Ukraine decreased by 3.8 per cent during the period of seven years shows that the decisions made by Ukrainian government on tax reduction brought positive outcomes. Both theoretical and empirical research has established that the common causes of operating in shadow economy are high tax burden and distrust in government and their tax policies. The empirical research on the impact of shadow economy factors in Ukraine has revealed that 99 per cent of shadow economy are explained by such factors as tax rate, overall employment rate, import of goods and services, GDP and participation of working-age people in the labour market. The research confirms the theoretical presumptions on the impact of higher taxes on the level of shadow economy. The growth of overall employment rate with active participation of young people can have a bidirectional impact on the level of shadow economy in Ukraine. On one hand, hired work increases the opportunities to earn legal wages, but on the other hand, the probability of getting wages “in envelopes” still persists. The tendencies of rising economics revealed through GDP, active participation of working-age people in the labour market as well as the increased volumes of import should reduce Ukrainian shadow economy and vice versa. In order to identify the impact of overall employment rate on shadow economy, an additional qualitative research should be carried out: we recommend surveying hired people on the plausible outcomes of shadow economy.