The Shadow Economy

April 2015 | Article

The Oxford dictionary defines the shadow economy as "illicit economic activity (such as black market transactions and undeclared work) existing alongside a country's official economy." The shadow economy is getting stronger and growing on a daily basis. Many individuals have been watching and investigating how the shadow economy is impacting communities and businesses. Citizens and business owners can help reduce the negative effects the shadow economy has by being aware of "shady" business practices and avoiding them.

How does the shadow economy work?
The shadow economy is fueled by stolen or counterfeit items on which no taxes are paid. Many people think that large corporations are the leading source of these stolen items, but that is not entirely correct. Any business (no matter its size) that has continuous inventory and/or loses/thefts could be feeding the shadow economy. On the other side, any business that purchases items "under the table," even if paying a legitimate business for their items, is also fueling the shadow economy. I recently heard of a law enforcement investigation of a small business in a strip mall where the investigation found that 50% of the store's inventory was counterfeit and the other 50% was stolen. The loss of tax dollars from this one store alone was in the tens of thousands.

What is the impact?
In short, the shadow economy impacts the amount of taxes that governments collect, and how governments use those collected taxes. As we all know, our lives are influenced on a daily basis by the governmental agencies around us. Those agencies are funded and able to complete their assigned tasks by using tax dollars. These tax dollars come in several forms: federal, state, county, and/or local mandates. The more taxes collected, the more our governmental entities can provide services. Conversely, when tax dollars are reduced, so are budgets and services. The shadow economy attacks the tax base and can affect many of the services we've become accustomed to having.

It's not just an issue in the United States; the shadow economy is a global problem. An ABC news articleThis link takes you to an external website. noted that the Chinese economy is being affected by the shadow economy. The article states the Chinese banking structure is being attacked because the banking shadow economy is the "equivalent of 40 percent of China's gross domestic product (GDP)."

What can be done?
No matter your thoughts on how well federal, state, county or local governments are using tax dollars, the fact is, all governments depend on tax dollars to provide basic services and any loss of tax funds directly affects quality of life. With this in mind, businesses need to ensure they are doing business with companies conducting legitimate business and not supporting "shady" business.

Communities are also stepping up. One large police department has taken the threat of the shadow economy seriously, and has established a Business and Economic Stability Team in an attempt to reduce the damage caused by this imminent problem. Support of the shadow economy has a negative impact on our quality of life, so it is up to each of us to do our part in protecting and researching the businesses we patronize and protecting our own inventory from the shadow economy.

For more information on strategies to counter the shadow economy, please contact your Eide Bailly representative.

Stay current on your favorite topics

SUBSCRIBE

Applicable Services

Take a deeper dive into this Insight’s subject matter.

Fraud & Forensic Advisory