Cash economy continues to grow

When the Prime Minister and the Treasurer were making the case for the introduction of the GST in the lead up to the 1998 federal election, and during the period up to July 2000, it was claimed, amongst other things, that the GST would wipe out the cash economy. They argued that the GST would increase the tax base and revenue raised would be used to fund the growing demand for public goods and services. Many experts at the time doubted the Government's claims as there was no empirical evidence anywhere in the world that the introduction of a GST or VAT had achieved any such outcome. In countries where similar attempts were made to reform the tax system the outcomes have been less than favourable.

The chickens have now come home to roost. The Government's claim has been shown for the illusion that it always was. The recent study by Christopher Bajada of the University of Technology in Sydney has shown quite conclusively that the black economy is significant and growing. According to the study, the black economy is estimated to be up to 15% of GDP. Based on the 2002/03 federal budget that was presented by the Treasurer in May this year, GDP is approximately $740 billion. That means that the extent of the black economy is as high as $110 billion.

The study, funded by the Taxpayers Research Foundation Ltd (which is a wholly owned and funded by Taxpayers Australia), has concluded that the results in Australia effectively mirror the results that occurred in Canada when it introduced its equivalent of the GST. According to the report '“
""""The current tax mix has motivated participation in the underground economy in Australia and Canada and it is likely, from the Canadian experience, that these activities will continue to grow in future.""""

The only tax reform change that had any possibility of influencing behaviour was the introduction of the Australian Business Number (ABN). The ABN targets business to business transactions and there is evidence that it has had the desired effect in reducing much of the activities that were previously unreported.

The problem is that much of the activities in the underground economy are driven by household participation. The level of activity has increased for two reasons - a combination of GST discounting by underground economy participants, and increasing participation.

The results of this study are staggering, but not unexpected. The issue that now confronts the Government and the Tax Office is what to do. The loss of over $100 million via tax evasion means that complying taxpayers carry an unfair burden. Further, it means both that the new tax system is not working, and that the ATO has not made any significant inroads into the growing underground economy despite its claims of having collected an estimated $2.6 billion as a result of the tax changes.

Most taxpayers are prepared to pay their fair share of taxes if they believe that others are also paying their fair share. That is not happening and if the conclusions reached in the study are correct then that is precisely why the underground economy will continue to grow in the future.