Measures to Combat Parallel Economy

The parallel economy is a serious issue that affects many countries worldwide. The growth of the informal sector poses significant challenges to the formal economy, such as reduced tax revenue, unfair competition, and a lack of government oversight.

To combat the parallel economy, governments must implement effective measures that address the root causes of this issue. These measures can include improving tax administration systems, promoting financial inclusion, reducing regulatory burdens, encouraging voluntary compliance, promoting international cooperation, implementing legal reforms, supporting small businesses, increasing public awareness, addressing corruption, and increasing the efficiency of the public sector.

In this article, we will explore some of these measures which can potentially impact on reducing the size of the parallel economy.

Measures to combat the parallel economy

Strengthening Tax Administration

Governments can strengthen their tax administration systems by deploying modern technology to ensure transparency and efficiency in tax collection. This could involve the use of electronic filing and payment systems, the adoption of a risk-based approach to tax audits, and the implementation of strict penalties for tax evasion.

Governments can also use data analytics and artificial intelligence tools to detect tax fraud and identify high-risk taxpayers. For example, the Brazilian government implemented the “Simples Nacional” program, a simplified tax system for small businesses that uses risk analysis algorithms to identify potential tax evaders and increase compliance.

Promoting Financial Inclusion

Financial inclusion can help to reduce the size of the parallel economy by bringing more people into the formal economy. This can be achieved through measures such as promoting the use of digital payment systems, increasing access to banking services, and providing financial education to individuals and small businesses.

In India, the government launched the “Jan Dhan Yojana” program to provide access to banking services to millions of unbanked citizens. The program includes the use of biometric identification and mobile banking technologies to facilitate financial transactions and reduce the reliance on cash.

Reducing Regulatory Burdens

Governments can reduce the regulatory burdens that drive individuals and businesses into the informal sector. This can involve simplifying business registration procedures, reducing licensing fees, and eliminating unnecessary regulatory requirements.

In Chile, the government launched a “Digital Agenda” program to simplify administrative procedures and promote the use of digital technologies in the public sector. As a result, the time required to start a business was reduced from 27 days to 7 days.

Encouraging Voluntary Compliance

Governments can encourage voluntary compliance by improving the tax system’s perceived fairness, reducing the tax burden on low-income earners, and providing incentives for taxpayers who voluntarily disclose their income and pay their taxes.

In the Netherlands, the government implemented a “Green Tax Shift” policy, which reduced income taxes and increased taxes on energy consumption and pollution. The policy aimed to encourage environmentally-friendly behavior while reducing the tax burden on low-income earners.

International Cooperation

International cooperation can help to combat the parallel economy by facilitating the exchange of information between countries on financial transactions and tax evasion. This can be achieved through the adoption of international tax standards, the development of tax information exchange agreements, and the cooperation of law enforcement agencies across borders.

Legal Reforms

Governments can also introduce legal reforms to combat the parallel economy. This could involve strengthening laws against money laundering and tax evasion, increasing the penalties for these offenses, and making it easier for authorities to seize the assets of those engaged in illegal activities.

In Italy, the government passed a law that allows authorities to confiscate assets from individuals suspected of tax evasion or other criminal activities. The law also includes provisions for plea bargaining and voluntary disclosure of income to reduce the penalties for tax evaders who cooperate with the authorities.

Encouraging Small Businesses

Small businesses are often a significant contributor to the parallel economy due to the challenges they face in accessing formal markets. Governments can address this by providing targeted support to small businesses, such as access to credit, training, and market information.

Increasing Public Awareness

Governments can increase public awareness of the negative impact of the parallel economy on the country’s economy and the society as a whole. This could involve launching public awareness campaigns, engaging with civil society organizations, and promoting media coverage of the issue.

Addressing Corruption

Corruption is often a significant contributor to the parallel economy, as it allows individuals to avoid paying taxes and engage in illegal activities. Governments can address this by implementing measures to prevent and prosecute corruption, such as strengthening anti-corruption laws, promoting transparency in government transactions, and empowering anti-corruption agencies.

In Brazil, the “Car Wash” investigation uncovered a massive corruption scheme involving government officials, construction companies, and politicians. The investigation led to the prosecution and conviction of dozens of individuals and the recovery of billions of dollars in stolen assets.

Increasing the Efficiency of the Public Sector

Inefficient and corrupt public sector services often push individuals and businesses into the informal sector. Governments can increase the efficiency of public sector services by investing in public service delivery and reducing bureaucratic red tape, thereby making it easier for individuals and businesses to access formal services.

In Estonia, the government implemented a digital government system that allows citizens to access public services online, including e-voting, e-taxation, and e-health services. The system reduced administrative costs and improved the quality and accessibility of public services.

Encouraging Use of Digital Currency

Governments can encourage the use of digital currencies to promote transparency and reduce the size of the parallel economy. By using digital currencies, transactions can be easily tracked, and it can be harder for individuals and businesses to evade taxes or engage in illegal activities.

Strengthening Border Controls

Governments can strengthen border controls to prevent the smuggling of goods and the evasion of taxes. This could involve increasing the number of customs officials, using technology such as scanners and X-rays to detect illegal goods, and implementing penalties for individuals caught smuggling.

Introducing Cash Transaction Limits

Governments can introduce cash transaction limits to discourage the use of cash for large transactions. This can make it more difficult for individuals and businesses to engage in illegal activities, such as money laundering, and can increase transparency in the economy.

Developing a Formal Labor Market

A significant portion of the parallel economy is made up of informal labor markets. Governments can develop a formal labor market by providing social security benefits, ensuring labor standards are met, and promoting the use of contracts between employees and employers.

In Mexico, the government implemented a social security program for domestic workers, who are often employed informally without benefits or legal protection. The program aimed to provide social security benefits and improve working conditions for domestic workers.

Promoting Economic Growth

Economic growth can help to reduce the size of the parallel economy by providing more opportunities for individuals and businesses to participate in the formal economy. Governments can promote economic growth by implementing policies that encourage investment, innovation, and job creation.

Investing in Education

Education can play a crucial role in reducing the size of the parallel economy. Governments can invest in education to provide individuals with the skills they need to participate in the formal economy, such as financial literacy and business management skills.

Addressing Income Inequality

Income inequality is often a significant driver of the parallel economy. Governments can address income inequality by implementing policies that provide a safety net for low-income earners, such as social welfare programs and progressive taxation.

In Norway, the government implemented a progressive taxation system that taxes higher-income earners at a higher rate than lower-income earners. The system aims to reduce income inequality and provide a safety net for low-income earners.

Improving Property Rights

Lack of property rights can make it difficult for individuals and businesses to access formal markets. Governments can improve property rights by implementing policies that protect property rights and promote property registration.

In Peru, the government implemented a land registry system that allows individuals and businesses to register and formalize their property rights. The system aims to reduce property disputes and promote investment in the formal economy.

Encouraging Good Governance

Good governance is essential for reducing the size of the parallel economy. Governments can encourage good governance by promoting transparency, accountability, and the rule of law.

Developing Infrastructure

Lack of infrastructure, such as roads, electricity, and water supply, can make it difficult for individuals and businesses to participate in the formal economy. Governments can develop infrastructure to improve access to formal markets and reduce the size of the parallel economy.

Conclusion

Overall, addressing the parallel economy requires a comprehensive approach that involves multiple policy areas, including taxation, financial inclusion, regulation, corruption, public services, labor markets, and infrastructure. By implementing effective policies and promoting good governance, governments can reduce the size of the parallel economy and promote sustainable economic growth.