Tuesday, January 11, 2011

Taxes, Regulations, and Laws Fuel Bangladesh's Underground Economy by Sean Dusk

Complex regulations and inefficiency of tax collectors are fueling the shadow economy, according to a Transparency International Bangladesh (TIB) study released a few days ago.

The study conducted in two methods found contrasting figures on the size of the shadow economy.

According to currency demand approach, the size of the shadow economy in Bangladesh averaged 10.1 percent of GDP during 1975-2008. The highest peak was at the end of the 1970s when the size of the shadow economy reached 20 percent of GDP, but later it came down to average 10 percent.

The dynamic multi-factor multivariable approach found the size at 38.1 percent of GDP during 1996-2008.

Shadow economy is part of the income of a nation that remains illegally undeclared either as a result of payment in kind or as a means of tax avoidance.

“Shadow economy worth 10 percent of GDP is generated only for tax burdens because people use currency to avoid paying taxes,” said Kabir Hassan, professor of University of New Orleans, USA, who conducted the study on behalf of TIB.

All variables, including regulations, taxes, economic status and indicator variables such as labour participation generated 38 percent combined.

The researcher averaged the size of the shadow economy at 24 percent of GDP, taking into account the outcome of the two approaches -- 10 percent and 38 percent. Informal economy was kept out of the study.

When regulations, laws, and taxes on goods and services are to much of a load for the parasite market to bear, black markets arise to meet demand. The TIB can collect the data on the shadow economy as they deem fit, but the conclusion is the same. The more government intrusion, the more the black market grows. 

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