How to shrink the underground economy: Tax less to collect more

There was a time when working in the ‘underground economy’ meant coal mining and related subterranean endeavours. These days, of course, it refers to the grey market, not the sooty black one. And at first blush it seems to be thriving

In April Statistics Canada released its latest estimate on the size of our country’s underground economy: $42.4 billion. With this up noticeably from $40.9 billion a year earlier, many commentators worried things are getting out of hand. “Canada has its work cut out for itself when it comes to cracking down on the underground economy,” the Toronto Star fretted. “The missing $42.4 billion means a lot of forgone tax revenue,” observed Canadian Business magazine.

But things might not be quite as bad as they seem in Canada’s shadowy underground economy. In fact Canadians’ tax honesty may actually be improving. What might be behind this apparent rise of tax truthfulness? One intriguing possibility lies in the Harper government’s much-maligned propensity to fiddle with the federal tax structure. Perhaps that panoply of boutique tax credits is actually making Canadians more honest at tax time.

While StatsCan pegs Canada’s underground economy at a sizeable $42.4 billion for 2012, in proportional terms the grey market actually appears to be on a long slow decline. Expressed as a percentage of total economic activity in Canada, the underground economy is 2.3 percent of GDP. That’s the same rate as 2011. For the nine previous years, it was 2.4 percent. Back in 1994 it was 2.7 percent. According the Canada Revenue Agency, which commissioned the research, “overall, the study provides encouraging signs that the underground economy is growing at a slower pace than the Canadian economy.”...