Download PRESENTATION TO OIREACHTAS COMMITTEE ON JOBS

PRESENTATION TO OIREACHTAS
COMMITTEE ON JOBS, ENTERPRISE &
INNOVATION
16th April 2013.
ISME is the independent voice of Small & Medium business in Ireland, representing in excess of 8,750
members across all sectors. The Association is owned and run by owner managers and is independent of big
business, government and unions; ISME is the TRUE voice of the Irish SME. www.isme.ie
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The Hidden Economy
The hidden economy includes activities that are not declared for tax purposes and usually carried out
in exchange for cash.
The black, grey or shadow economy is made up of everything from criminal racketeering, nixers,
illegitimate dole claims and undisclosed employment, undeclared work, where workers and
businesses do not declare their wages/earnings to avoid taxes. Under-reporting which occurs
primarily in cash-based businesses that only report part of their income in order to avoid some of the
tax burden; and Illicit trading (trade in tobacco, diesel, fireworks etc.).
There is always an element of hidden (or shadow) economy activity within any jurisdiction – however,
this is often exacerbated during times of economic recession and high unemployment. There is a
general acceptance that this is the case in Ireland.
Small businesses contend that much of the competition they face comes from the delivery of services
for (undeclared) cash. This includes, for example, home improvements and decoration, waste
disposal, gardening services, furniture removal etc.
The ‘nixer’ culture, in particular, is very much alive and well and there has been a definite shift
towards a ‘cash only’ shadow economy. This is particularly evident in the construction and
maintenance sectors, where there are increased incidences of ‘jobs for cash – no vat’, completely
undercutting legitimate companies, who in many instances report that potential clients are demanding
that they pay ‘off the books” to save VAT. When individuals or companies carry out undeclared
services for cash it undermines the ability of legitimate and above board businesses to compete. The
legitimate provider is more often than not registered for VAT - this alone equates to a 13.5 per cent
price differential.
Racketeering and rogue operators are profiting massively from illegal sales, whether cigarettes or
diesel, which is costing the exchequer millions of Euro per annum. Newsagents and convenience
store owners can tell the ISME help-line when a consignment of illegal cigarettes arrives, as their own
sales drop dramatically. Ironically, this activity will close a local business, with local job losses but the
locals have their cheap fags, so who cares. These same locals will be the first to whinge when they
can’t buy a bottle of milk locally but fail to, or don’t want to see the connection, hence the need for a
awareness campaign.
While it is difficult to put an actual figure on the costs of the black economy, previous international
estimates suggest that in Ireland it amounts to 16% of GDP, which equates to €25bn1 this year and
the figure could be much higher. The amount of lost taxes is conservatively estimated at €5bn, which
would go a long way to reversing the current exchequer revenue shortfall, funding schools and
hospitals and other public services.
1
CSO figures for GDP €160bn. 2012.
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Irish Hidden Economy as a % of GDP
1999
2000 2001
16.1
15.9
2002 2003
15.9 15.9
16.0
2004 2005 2006 2007
2008 2009 2010
15.8
15.9 17.5
15.6
15.5 15.9
16.5
Average2
16.1
Causes
The following six hypotheses are based on the work done by Professor Friedrich Schneider, the
leading international expert on Hidden Economy.
1. The higher the tax burden, measured by the personal income tax, payroll taxes, and/or indirect
taxes, the bigger the shadow economy.
2. The lower the tax morale (willingness to pay fair tax), the bigger the shadow economy.
3. The higher unemployment, the bigger the shadow economy.
4. The more regulated official business activities, the bigger the shadow economy.
5. The higher the self-employment quota, the bigger the shadow economy, ceteris paribus.
6. The lower the quality of institutions measured by the rule of law, the bigger the shadow
economy.
Policy Conclusions.
What type of policy conclusions can we draw? One conclusion may be that - besides the indirect tax
and personal income tax burden, which the government can directly influence by policy actions – selfemployment and unemployment are two very important driving forces of the shadow economy.
Unemployment may be controllable by the government through economic policy in a traditional
Keynesian sense; alternatively, the government can try to improve the country’s competitiveness to
increase foreign demand.
The impact of self-employment on the shadow economy is less or only partly controllable by the
government and may be ambiguous from a welfare perspective. A government can deregulate the
economy or incentivize “to be your own entrepreneur”, which would make self-employment easier,
potentially reduce unemployment positively contributing to efforts in controlling the size of the shadow
economy.
Such actions however need to be accompanied with a strengthening of institutions and tax morale to
reduce the probability that self-employed shift reasonable proportions of their economic activities into
the shadow economy, which, if it happened, made government policies supporting self-employment
less effective.
Irish Situation
So many householders are increasingly more resentful of their role models, the politicians, bankers
and auditors, to name but a few, who have fiddled, evaded or not paid their proper tax, while the
2
Shadow Economies in Highly Developed OECD Countries: What Are the Driving Forces? October 2012 Friedrich Schneider
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citizens suffer increased income tax, universal social charges, household property tax on reduced
wages. No wonder these people are angry and refusing to deal with service providers unless they
agree a “no tax” or “cash only” price.
Like prostitution, until both client and prostitute are sanctioned, the problem will remain. Similarly the
black market seller and the buyer must be penalised. We also need a high profile public campaign to
educate the public on the economic damage and the impact this has on their own locality and on the
provision of public services. The insurance fraud campaign “he’s putting his hand in your pocket” is
successful, why not something similar for the black economy with harsher penalties.
The ISME position on the Black Economy is that a reduction of the shadow economy can be achieved
using various channels the government can influence. The main challenge still is to bring shadow
economy activities into the official economy, so that goods and services are still produced and
provided at an economic cost while the government gets additional taxes and social security
contributions.
The implications arising from the hidden economy are substantial and wide reaching (including
employment, government taxes and services, and general society). There is a need to raise
awareness, to highlight the costs to society, to address attitudinal and cultural factors that mean that
many turn a blind eye to illicit activities. We think that a whole of government commitment to
combating the problem would be demonstrated if an inter-departmental approach was taken to
developing and promoting an awareness campaign that would deliver a clear, yet comprehensive
message
Proposed Action –short to medium term.
1. Develop and implement an awareness/advertising campaign to communicate the issues and
to highlight the positive impacts of a reduction of hidden economy activity on the Irish
economy, jobs and society, and also the negative consequences of dealing in the hidden
economy for the consumer personally. The work of the Hidden Economy Working Group
should be promoted and supported; an example is the Good Citizen’s Report which helps to
identify hidden economy participants.
2. The introduction of a social welfare amnesty would allow for individuals to come forward for a
defined period and legitimise their tax/earnings status on the basis of forgiving the past and
wiping the slate clean. Penalties and consequences should be enhanced considerably (zero
tolerance) in the event of fraudulent activities being subsequently detected. It would facilitate
those who have the potential for maintaining a business to legitimise – and would remove
unfair “competition‟ and level the playing field for the small business that is trading legitimately.
3. A radical review of the current taxation and social welfare system to ensure that the ‘tax wedge’,
the monetary difference between being gainfully employed and claiming social benefits, is changed.
4. Tax incentives should be offered to home owners who use tax compliant, verifiable trades
people.
5. Many services for cash are carried out by people in commercial vehicles. Currently anyone
registering for motor tax at the (cheaper) commercial rate for commercial vehicles must sign a
declaration in the presence of a Garda that the vehicle will be used for commercial purposes
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and must state their Income Tax Registration; however there is no formal mechanism in place
to validate their legitimacy as a business/commercial operation. Introduce a mechanism that
ensures that information provided to the Gardaí on the Goods Only Declaration for the taxing
of commercial use vehicles is validated as a matter of course.
6. A number of initiatives have been put in place to deliver on the Revenue Commissioners
Strategy on Combating the Illicit Tobacco Trade (2011-2013). Increased emphasis is needed
to ensure the risk of detection is further enhanced. Increase awareness among retailers of the
hot-line and manage expectations in terms of the confidential nature of the service.
7. Introduce container scanners at Irish ports where the volume and frequency of container
traffic justifies the investment. Partial funding can be sourced through the EU Hercules 11
(anti-fraud programme), and consideration should be given to the role of industry in this regard.
8. Harsher judicial penalties should be imposed on those caught operating in the black economy.
9. The entrepreneur has a broad range of issues to consider when starting a business - gaining a
customer base, assessing the competition, financing the business, pricing, invoicing,
accommodation and all that goes with it. Encourage compliance at the earliest stage of the
start of the business. Often tax issues are perceived as onerous and complex - and the job of
the Accountant. As a consequence, businesses can either inadvertently become involved in
operating illicit activities in the early stages of their establishment; or, having got into bad
habits, continue to operate at least part of their business operations “under the counter‟.
10. Specifically related to tax, the Revenue Commissioners should visit start-ups on a risk
assessment basis. They publish Starting in Business – A Revenue Guide, which covers all
aspects of taxation (including registration, VAT, keeping of books and records etc.). The
Revenue Commissioners will also visit a new business if requested, to advise on what steps a
company should take at the start. Unfortunately, there appears to be a lack of awareness of
what is available. Encourage firms to use the existing system to request a visit from a
Revenue official following tax registration
11. Review the Starting in Business – A Revenue Guide to identify ways in which the content
could be made more accessible to the owner/manager and to non-accountants (i.e. written in
Plain English) with step by step „what I need to do‟ instructions for tax compliance. Consider a
short form guide that is the “what I need to know‟ for the owner/manager, which limits the
content to the basics with an option to get additional information from the existing 32 page
guide as needed.
12. Rebrand relevant guides and materials as a Start Right initiative and use a variety of channels
to make the guide available including: CEBs, BICs, Banks, enterprise agencies, business
organisations, Local Authorities, solicitors, accountants, libraries, schools,
universities/colleges, etc.. Use company registration/VAT registration as a trigger to issue
the Guide. Integrate the Start Right Guide as part of the Start Your Own Business Courses.
16th April 2013.
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