THE PROBLEM WITH VARIETY IN DEFINITIONS OF THE SHADOW ECONOMY

Abstract

Shadow economy has a lot of different names in scientific literature. For example, it is called underground, unofficial, informal, alternative, second, parallel, illicit, illegal, irregular, cash, hidden, non-observed, unobserved, unrecorded, subterranean, occult, black and etc. Although these concepts seem to be similar, they have different meanings. Due to the complexity of economic processes (Dell’Anno, Gomez-Antonio, & Alanon-Pardo, 2007; Krumplytė, 2008, 2009; Maskvytienė & Valuckaitė, 2017; Misiūnas, 1999; Nikopour, Habibullah, & Schneider, 2008; Schneider & Enste, 2000; Schneider & Hametner, 2007)namely France, Spain and Greece. A multiple indicators and multiple causes model based on the latent variable structural theory has been applied. As established by Giles (Working paper on monitoring the health of the tax system, 1995, the shadow economy covers many areas. Therefore, each researcher choses which field to investigate and defines one`s own concept of the shadow economy. Due to this reason, scientific literature faces the problem of the variety of definitions of shadow economy definitions: as each author defines their own concept of the shadow economy, research in this area lacks continuity and comparability of results. Thus, the aim of the article is to propose a unified definition of the shadow economy. It is done by comparative analysis of various concepts, e.g. informal economy, underground economy, shadow economy. Each concept is described in a structured way by applying typological classification to each subtype. After comparing different types of informal economy, underground economy, shadow economy concepts, the unified definition of shadow economy is suggested. Taking into account the prevalent conceptions, reasons for involvement and nature of shadow activities, the author of this article distinguishes three types of the shadow economy - underground, informal and illegal. The underground economy covers legal market output (e.g. undeclared income from legal activities, envelope salaries, hidden income, hidden value added or other taxes). The illegal economy includes illicit production (e.g. drug trafficking, illicit alcohol, smuggling). The informal economy covers output from entities that have no obligation to register or output for private use (e.g. own-account production of households, auxiliaries). Summarizing the concept of the informal economy, the following conclusion can be done: shadow economy is a market-based process that violates legal regulation or otherwise adversely affects state’s tax revenue and financial interests where public authorities are not formally aware of such activities due to tax avoidance or other benefits.