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Researching Unofficial Economy presentation notes by Katarina Ott - Institute of Public Finance

1. Croatia in figures

• - population 4.5 mill

• - GDP p.c. US$ 4.500

• - unemployment rate 22 %

• - growth rate    minus 2 % in 1999

•                        plus 1.4 % in I-VI 2000

2. Some basics on Croatia

• - break up with Yugoslavia

• - independence war

• - transition

3. Poverty in Croatia

• - absolute poverty line   internationally 4.0 %

•                                                 nationally 8.4 %

• - main victims are poorly educated and elderly

• - prospects are worrying

•             - limited economic opportunities

•             - over-regulation of employment

•             - over 50 % are long-term unemployed

•             - wide gap between the rich and the poor

•             - low elasticity of poverty with respect to growth

4. UE manifestations in Croatia

• - markets full of smuggled goods

• - unregistered workers

• - non payment of taxes and social security contributions

• - foreign exchange dealers at every corner

5. Researching UE

• - defined the size of the UE

• - basic characteristics

• - social and cultural aspects

• - relationship with the economic policy

• - role in the process of privatization

• - influence on development, growth, etc.

6. Why is UE so important?

• - besides its characteristics that are valid everywhere (information distortion, lost government revenues, efficiency and distribution effects, destroying social fabrics)

• - in Croatia it is greatly generated by the state

• - transformation of ownership rights

• - where private and public ownership meet

• - make opportunities for rent seeking, bribing and corruption

• - source within the state - it is why it is big and interwoven in all legal and illegal aspects of life, polity, etc.

• - economics as a science is helpless

• - path dependency theory is questionable

• - nontransparent, vague and fluid nature

7. Common mistake

• - that UE is good because

• - it is correcting mistakes of the regular economy and the state

• - people are better off as they are finding their own ways, etc.

• - that could work in countries like Switzerland or Denmark with

• - excellent democratic and regulatory framework

• - and only if the share of the UE is very small

• - in countries with the big UE and weak legal, regulatory and democratic attitudes and institutions, UE could become prevalent one with consequences like

• - corruption,

• - rent-seeking,

• - Mafia,

• - lawlessness,

• - insecurity,

• - budget deficits,

• - bad public services, etc.

• - that all could promote further social, political and economic backwardness.

8. What is particularly dangerous?

• - absence of democratic, economic and regulatory institutions,

• - along with extensive discretionary rights of public officials,

• - lead to corruption, rent seeking and various irregular activities

• - underground rooted practices are becoming driving forces

•             - not just for the UE, but

•             - for the measures taken in regular economy, legal and political system, etc.

9. What should be done?

• - it's up to the government to decide

•             - how to improve its institutions

•             - what priorities to set

•             - what processes to use in obtaining the set goals

• - it's up to the society as a whole

•             - to understand these processes

•             - to create institutions able to deal with them

10. What are needed institutions improvements?

• - more transparent laws and regulations

• - improvements in judicial system (strengthening independence of courts)

• - improvement and better accessibility to statistics

• - breaking with paternalistic capitalism

• - strengthening democratic control forms

11. Possible tax related researches

• - tax burden (individual, company, particularly SME)

• - tax compliance

• - tax evasion

• - social security contributions vs. social security reform

• - tax structure

• - administrative and compliance costs of taxation

• - budgetary expenditures

• - size of the state

Tax Related Researches

Researching tax burden

• - progressive vs. regressive tax system

• - progressive - individual's average tax rate increases with income

• - regressive - individual's average tax rate decreases with income

• - under progressive - tax burden distributed so that rich pay relatively more tax than the poor

• - goal: define progressiveness and its changes during the time 

common statements

• - total tax burden is not equitably distributed

• - rich should pay more taxes

• - VAT is regressive

• - other taxes are not enough progressive

for obtaining the distribution of the total net tax burden it is necessary to

• - define distribution of the tax burden for individual categories of individuals income

• - consider all existing kinds of direct and indirect taxes

• - finally consider social transfers distributions (as a kind of negative taxes)

it is very comprehensive task

• - distribution of all taxes and social transfers for all income categories

• - necessary to decide upon stages

• - start researching distribution of only one kind of tax

• - gradually add other taxes

• - finally analyze social transfers

in Croatia

• - we started with personal income tax

• - 6 years period

• - numerous changes (rates and deductions, etc.)

• - how these changes affected progressiveness 

basic problems

• - collecting reliable data

• - cooperation with tax administration 

Researching tax evasion tax evasion = not paying legally due taxes 

what to research

• - define the concept - definitions, measures, manifestations

• - tax revenues evasion

•             - personal income tax

•             - corporate income tax

•             - VAT or sales taxes

•             - excise taxes

•             - customs duties

what to define

• - official GDP

• - adjusted GDP if necessary

• - tax revenues paid

• - potential tax revenues

• - tax evasion as % of GDP

in Croatia

• - we did 3 years estimates

• - all major taxes

• - central government and general government

Researching tax collection costs

• - administrative costs born by tax administration

• - compliance costs born by taxpayers

why to research

• - considerable part of the total costs in the economy (Croatia - admin. costs 0.55% of GDP or around 2% of budgetary revenues, multiplier)

• - additional tax burden on products that reduce the competitiveness of exports

• - costs are regressive

• - indicator of the complexity of the tax system

• - administrative vs. compliance costs

• - generate resentment affecting voluntary compliance and tax evasion

why there is no interest except in the most developed countries

• tax experts too few, overloaded

•  no tax associations, civil initiatives, NGOs, taxpayers' rights, etc.

• role of the WB and IMF

obstacles

• constant changes

• expensive researches (surveys, interviews)

• relationship with authorities

in Croatia

• we did administrative costs

• 5 years period