GST blamed for growing underground economy

web posted July 1997

The introduction of the GST was the single most important factor contributing to the growth to Canada's underground economy (UGE), according to the Fraser Institute.

The authors of Underground Economy: Global Evidence of its Size and Impact also provide compelling evidence that Canada's UGE could be as large as 20 percent of Gross Domestic Product, or nearly $160-billion -- a sharp contrast to Statistics Canada's estimate of 2.7 to 5 percent of measured GDP.

"The Underground Economy is growing by stealth in Canada," writes contributing author and Government of Ontario economist Peter Spiro, who estimates that between 1991 and 1993 the UGE grew by $14-billion. "This would translate into a $6-billion revenue loss for all levels of government in Canada, an amount equal to nearly 12 percent of the deficits of all government levels in 1993."

Something that the authors find even more disturbing is that Canadians believe that tax evasion is growing and widespread -- a view that is particularly prevalent among younger Canadians. "If the latter is true," said Bruce Flexman, co-contributor and KPMG tax specialist, "it is a very disturbing trend, especially since younger generations will inevitably inherit the problems of dealing with a sizeable national debt."

Flexman's survey shows that 74 percent of Canadians agree that "the present tax system is basically unfair to average Canadians"; 61 percent feel "that there was a lot or a fair amount of tax evasion"; three-quarters of respondents agree "that fewer people would avoid taxes if they were lower"; and 72 percent agree that "most people would cheat on their taxes if they knew they would get away with it".

Because attitudes towards government taxation and spending influence the willingness of individuals to engage in the Underground Economy, Canadian economists Jonathan Kesselman and Francois Vaillancourt suggest that the way to reduce tax evasion and illegal activity is to re-align incentives through a combination of reforms both in enforcement and the level and kind of taxes.

"Taxpayers will be more compliant if they perceive that they are receiving good value for their tax dollars," said Owen Lippert, senior policy analyst at the Fraser Institute and co-editor of the book, "and they'll also be more compliant if they perceive the tax system as fair in its operation and distribution of burdens. Unfortunately these perceptions are not reflected in reality today."

"The tragedy of the enormous growth of the underground economy is that once the domain of drug pushers and bootleggers, it is increasingly frequented by otherwise law-abiding citizens," added Michael Walker, executive director of the Fraser Institute and co-editor. "And in the absence of government action to stop the tax erosion of citizens' standard of living, many will be motivated to cheat the taxman."

While Walker finds it a tragedy, it merely proves that capitalism, like water, will always find a way around an obstacle. Congratulations to the tax cheats of Canada!

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