Individual Approach to the Shadow Economy

Abstract

This article analyzes the relationship between the shadow economy and tax evasion in order to verify if their dynamics are substantially identical or may present elements of differentiation, even though the two aforementioned phenomena appear (on the basis of certain statistical definitions) to overlap in terms of economic values. To this end, the article proceeds by providing a series of terminological definitions that are useful to properly classify these phenomena and then it lists the main methodologies used for their quantification. Although such methods and their strengths and weaknesses are well known in economic studies, it is useful to recall them in order to underline some questions connected with the development of a model aimed at describing the approach to the shadow economy and tax evasion from a microeconomic perspective. The first question is if the underground economy can exist in absence of tax evasion and, in that case, which are the factors that allow it. A related question is how is it possible from a microeconomic perspective to estimate in percentage the overall disadvantage (fiscal and non-fiscal) deriving from the total declaration of economic activities to public authorities compared to firms that work in the underground economy? On this matter, reference to case law and regulatory measures, performed in order to create an economic-juridical parallel on the shadow economy and tax evasion, has been made with regard to the Italian legal system, so as to fit the mathematical model as much as possible to observed facts. JEL: K42, H26, O17