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Nick Shaxson ■ The Cost of Tax Abuse

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The Cost of Tax Abuse

This report assesses the cost of tax evasion worldwide in 2011. In this report, we first estimate the absolute size of a country's shadow economy based upon its own published estimate of its GDP and recently-reported data on the size of shadow economies published by the World Bank. This, and other data we use, is what we think the best currently available for the purpose of this report and, as such, should provide the best estimates currently possible.

Tax evasion is the illegal non-payment of tax to the government of a jurisdiction to which it is owed by a person, company, trust or other organisation who should be a taxpayer in that place;
 
It is very largely people’s desire to evade tax that creates most of the so called ‘shadow economy’ that is hidden from officialdom’s view to make sure that tax is not paid.
 
In this report, we first estimate the absolute size of a country’s shadow economy based upon its own published estimate of its GDP and recently-reported data on the size of shadow economies published by the World Bank. This, and other data we use, is what we think the best currently available for the purpose of this report and, as such, should provide the best estimates currently possible.
 
By the definition used here, economic activity in the shadow economy of a country will be tax-evading. So we next calculate an estimate of the amount of tax lost as a result of the existence of that shadow economy. We do this by looking at how much taxes are on average in the state as a share of GDP, and then apply that same tax share to the shadow economy, to reveal our estimates of lost taxes by state. We then compare these lost taxes to healthcare spending in each country surveyed. This data has also been compared by continent.
 
The scale of estimated tax evasion that the research suggests takes place is staggering in both its value and its likely impact. The data used for this research covered 98.2% of world GDP and 92.4% of the world’s population. It estimates that total tax evasion of in excess of US$3.1 trillion, or about 5.1% of world GDP, occurs as a result of the operation of the shadow economies found in every state in the world. Part, but not all of this, will relate to tax haven activity.
 
Total healthcare spending in the states surveyed amounted to US$5.7 trillion. As a result tax evasion cost, on average, 54.9% of health care costs in the states surveyed, a ratio only as low as that because by chance the USA has the highest healthcare cost s, one of the lowest tax evasion rates in the world and the highest national GDP. The problem for most countries is, as a result, much bigger than this average implies.
 
Data on tax evaded by country is available in reports that accompany this research that show the data:
 
       ranked alphabetically;
       ranked by total tax evaded;
       ranked as a share of health care spend.
 

Key findings

  • In 2011 according to estimates, total tax evasion is in excess of US$3.1 trillion, or 5.1% of global GDP, and is due to activity in the shadow economy.
  • Only a minority of this is due to tax havens.
  • Total healthcare spending worldwide amounted to $5.7 trillion and so tax evasion cost, on average, 54.9% of healthcare spending.
  • The unweighted average rate of tax evasion to healthcare spending is 110%.

Key recommendations

  • What this research shows is that more than $1 in every $6 in the world is not subject to tax precisely because those earning it deliberately ensured that it would be hidden from the world’s tax authorities. The ratio is higher in Europe, where the shadow economy in which tax evasion takes place represents more than €1 in every €5. In the states such as Greece and Italy, where economic collapse looks likely and where the threat to the stability of both the European and global economies is centred, that ratio is worse still: more than €1 in €4 is in the shadow economy in these countries.
  • Tax evasion is always a crime. Tax evasion on this scale is not just a personal crime though: it then becomes both a crime against society and a crime against democracy. That is because both societies and democracy can fail as economies falter when the demands for government services increase in times of economic crisis but the people willing to make payment for them are too few in number. Tax evasion is at the core of the crisis in the world’s economies as a consequence. It is our suggestion that tackling tax evasion is one of the necessary conditions for solving that crisis and at the same time providing the healthcare, education, pensions and other services the people of the world need.

Additional resources