Transcript 1. EU-Turkey relations

SHADOW ECONOMIC ACTIVITIES IN TURKEY: A
REVIEW OF THE LITERATURE
V. Vlachos, A. Bitzenis, P. Kontakos
University of Macedonia, Thessaloniki, Greece
Friday, February 6, 03:00 PM - 04:45 PM, Hotel Titania, Athens
Session F1, Room Platon
International Conference on Business & Economics,
Hellenic Open University, Athens, February 6-7, 2015
Note: The current paper is presented under the auspices of the
THALES Research Programme. THALES Programme has been cofinanced by the European Union (European Social Fund - ESF) and
Greek national funds through the Operational Program “Education and
Lifelong Learning” of the National Strategic Reference Framework
(NSRF).
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Foreword to our Project
• Our aim is to research and measure the various aspects of
shadow economy in Greece, including corruption, tax avoidance,
social contribution avoidance, undeclared or illegal work, shelf
consumption, illegal acts (black or underground economy).
• It will cover all economic agents in Greece, such as citizens and
corporations (e.g. public and private individuals, companies and all
professional categories, etc.)
• The research is also performed at sector levels, e.g. to identify the
extent of tax evasion and corruption in the trading of oil in Greece.
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Foreword to our Project (cont.)
• It does not aim to the precise percentage regarding the
measurement of Greek shadow economy but aims to the qualitative
analysis of questionnaire results and the comprehension of the
problem.
• The implementation of our interviews, scientific games and
economic experiments (tax compliance games) will involve at least
2,000 individuals and business owners (in majority small
businesses).
• The project aspires to achieve numerous objectives, among which
the development of a relevant theoretical background, and
perform cross-country comparisons at regional level (e.g.
Bulgaria, Turkey), but also with country groups with advanced
taxation systems (e.g. Austria, Germany, Switzerland, France),
other Mediterranean countries (Italy, Spain), South Eastern
(Bulgaria) and transition and developing economies (Turkey, Peru).
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Agenda
1. Aim of the paper
2. Introduction
3. Stylized facts and scope of the study
4. Turkey
5. Conclusions
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1. Aim of the paper
• To identify which factors have an impact on tax morale and tax
compliance in the case of Turkey.
• Empirical evidence retrieved from other contemporary studies
is utilized for this purpose, based on an extended literature review
performed by the authors.
• The methodology used is that of descriptive analysis.
• A comparative profile for Turkey is developed, with reference to
various aspects of shadow economy, including corruption, tax
avoidance, social contribution avoidance, undeclared or illegal work,
shelf consumption, illegal acts (black or underground economy).
• Our ultimate aim is to use Turkey, as well as other developed and
developing countries, as benchmarks and input for future work in
the case of Greece.
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2. Introduction
The report is structured as follows:
• The next section provides a synopsis of some stylized facts
pertaining to the shadow economy, i.e. its synthesis and
determinants, the methods to measure it, its impact on the official
economy and its relation with corruption. The same section also
provides information about the studies reviewed.
• Sections 4 refers to the country of interest, i.e. Turkey.
• Finally, section 5 summarizes the findings of the studies
reviewed.
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3. Stylized facts and scope of the study
• A wide range of methods has been developed to evaluate and
understand the dimensions and causes of shadow economy and
corruption in the past three decades.
• These can be generally grouped under two approaches: indirect
(macroeconomic) and direct (microeconomic) methods of
measurement.
• Indirect methods are mainly intended at measuring the size of
shadow economy. The real meaning of these methods is that they
construe observable phenomena as signs of the unseen part of the
economy. The most famous are discrepancy methods based on
data comparisons, e.g. between labour force surveys and business
statistics, as well as monetary methods (see e.g. Schneider and
Enste, 2000).
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3. Stylized facts and scope of the study (cont.)
• Direct methods refer to survey-based methods. They can
measure not only the size but also the structure & motivations
of the participants involved e.g. in undeclared work. Such methods
have been applied in a number of countries in recent years.
• The commonly found macro estimations of the shadow economy
is based on cross-country panel estimates of the multiple
indicators multiple causes (MIMIC) approach that succeeded the
currency demand approach (see the work of Schneider).
• The commonly explored determinants of the MIMIC approach are
the tax burden (+), the self-employment quota (+), the
unemployment rate (+), regulations (+), the quality of formal
institutions measured (-) and the level of tax morale (-).
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3. Stylized facts and scope of the study (cont.)
• With regard to the countries of interest to our wider report, the
average estimates for the period 1999-2007 are:
• 27 percent of GDP for Italy;
• 22.5 percent of GDP for Spain;
• 16 percent of GDP for Germany;
• 15 percent of GDP for France;
• 9.8 percent of GDP for Austria;
• 8.5 percent of GDP for Switzerland and
• 31.3 percent of GDP for Turkey (Schneider et al., 2010).
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3. Stylized facts and scope of the study (cont.)
• The terms included in this report are shadow /informal
/underground economy, which have the same meaning. The total
hidden or total unobserved economy includes criminal activities.
The formal /official economy are terms with the same meaning.
Informal employment /labour and undeclared work have the
same meaning and constitute part of the shadow economy.
• The shadow economy is more than tax evasion as it is the sum
of all forms of tax non-compliance which are irrelevant to tax
evasion, such as tax avoidance and concerns other activities
generating concealed income such as bribery.
• Another issue discussed is the relation/effect of the shadow
economy on the formal economy. The shadow economy may be
pro-cyclical (i.e. follow) or counter-cyclical to the business/economic
cycle. Schneider (2005) finds a negative correlation for developing
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countries & a positive for developed & transition countries.
4. Turkey
• The common features of the estimations of the Turkish shadow
economy from papers published in the 1990s to mid-2000s, is that
they follow the currency demand approach:
– For the period of 1963-1990, Kasnakoglu (1993) finds that the
shadow economy ranges from 0 to 23 percent of GDP.
– For the period of 1970-1997, Halicioglu (1999) finds that the
shadow economy ranges from 0 to 10 percent of GNP.
– For the period of 1971-1999, Ogunc and Yilmaz (2000) find that
the shadow economy ranges from 11 to 22 percent of GNP.
– For the period of 1968-1993, Cetintas and Vergil (2003) find
that the shadow economy ranges from 17 to 31 percent of
GNP.
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4. Turkey (cont.)
• MIMIC estimates of the shadow economy range from 10 to 45
percent of GDP for the period of 1970-1998 (Savasan, 2003) to
32 to 35 percent of GDP for the period of 1999-2005 (Schneider
and Savasan, 2007).
• In other approaches, Karanfil and Ozkaya (2007) explore
environmental indicators and report that the shadow economy
ranges from 12 to 30 percent of GDP for the period 1973-2003;
Davutyan (2008) adopts the Pissarides-Weber expenditure
approach and finds that the shadow economy was 21 percent of
GDP in 2005.
• Dell'Anno and Halicioglu (2010) emphasize on the criticisms about
the reliability of currency demand estimations and adopt an
autoregressive approach / co-integration analysis. They find that
the shadow economy expanded from 10.7 percent of GDP in 1987
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to 18.9 in 2007.
4. Turkey (cont.)
• Schneider and Savasan (2007) find that the shadow economy is
positively linked primarily to the direct taxation and social
security burden and to a lesser extend by indirect taxation. The
authors also indicate a positive relationship of the shadow
economy with unemployment and a negative with GDP per
capita, which both signal for a counter-cyclical trend.
• Dereli (2011) emphasizes on the importance of the tax burden,
the inefficiency of the auditing and inspection mechanisms, the
political intervention that results in tax amnesties on a regular
basis, income inequality (low wages force individuals to find a
second job in the shadow economy in order to fulfill their needs) and
the perceptions regarding the quality of public services.
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4. Turkey (cont.)
• Turning to informal labour through irregular migration, an EU
funded study (Icduygu, 2006) about the relationship between
irregular migration flows and the Turkish shadow economy
reveals two broad phenomena:
– On the one hand, irregular immigrants benefit from the
opportunity to get easily absorbed by the country’s vast
shadow economy and end up doing less desirable jobs.
– On the other hand, irregular immigrants may become victims
to criminal trafficking networks or be subjected to forced
labour.
• By addressing the main features of the Turkish informal labour
market, Ozdemir et al. (2004) emphasize on the problem that rapid
urbanisation is not accompanied by employment creation in
technology or manufacturing sectors. As a result, the majority of
families depend on non-industrial, unskilled work and have to
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face the continuous inflow of irregular immigrants.
4. Turkey (cont.)
• Turning to the issues of deterrence and tax compliance, McGee et
al. (2011) explore the ethics of tax evasion by surveying 176
Turkish accounting practitioners.
• The authors find that opposition to tax evasion is weakest in
cases where the government is perceived as corrupt or where
the system is perceived as being unfair and in that sense,
highlight the significance of tax morale. Moreover, the authors
indicate the presence of a gender effect (male practitioners are
significantly more opposed to tax evasion than females) and an age
effect (younger practitioners are less opposed to tax evasion than
the older).
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4. Turkey (cont.)
• Last but not least, Turkey is affected by the phenomenon of
corruption as several case studies reveal.
• However, according to the Corruption Perceptions Index results
for 2013, Turkey is placed on the 53rd position which is far better
than eurozone countries such as Italy and its neighbor, Greece.
• A study focusing exclusively on the determinants of corruption
in Turkey has not been published to date. As a result, information
on the subject concerning exclusively its Turkish dimension arise
from case studies (such as Velioglu and Argan, 2005) and from the
business literature (with respect to its ability to hinder business
activity).
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4. Turkey (cont.)
• Tatar et al. (2007) explore with a questionnaire the belief that a
considerable amount of out-of-pocket payment in the health
sector in Turkey is informal.
• Their study is based on a sample of 3,727 subjects (face to face
interviews were carried out in a medium size city in 2002). The
authors report that 25 percent of total out-of-pocket payments
were informal and that each amount of both formal and informal
payments was of equal size.
• The authors state that the majority of out-of-pocket informal
payments in public sector health care providers was for drugs
and was followed by respective payments for physicians’
surgical services. The authors argue that this finding implies the
effect of underinsurance. Finally, the authors assert that the
motive behind out-of-pocket informal payments was for getting
more attention at the time of treatment or in the future.
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7. Conclusions
• The paper reviews the size and determinants of the shadow
economy in Turkey.
• The content of this manuscript is a byproduct from an ongoing EU
funded project titled “The Shadow Economy (Informal Sector) in
Greece: Size, Causes and Consequences”.
• Our wider project, named as THALES, aims to facilitate the
understanding of the reasons of black/shadow economy in
Greece, the typology of Greek taxpayers and of the factors that
influence and shape his/her behavioural dynamics.
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7. Conclusions (cont.)
• Our Project, as aforementioned, aims also to perform crosscountry comparisons at regional level, but also with country
groups by advanced taxation systems, other Mediterranean
countries, South Eastern Europe and transition and developing
economies.
• A mixture of suggestions and structural policies are expected to
be provided to the Greek Government at the conclusion of the
research, for the efficient conduct of black/shadow economy and tax
evasion in Greece.
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