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Friedrich Schneider and Dominik H. Enste, The Shadow Economy: an International Survey.

FRIEDRICH SCHNEIDER and DOMINIK H. ENSTE, The Shadow Economy: An International Survey (Cambridge, U.K.: Cambridge University Press, 2002, pp. xiii, 222, $55.00).

During the last two decades, policymakers and tax researchers have devoted substantial energy to developing a better understanding of the causes, effects, and consequences of economic activity within the underground (or shadow) economy. The difficulties of defining and measuring such activity, combined with the challenge of assessing its implications for official economic policy, have limited the progress of researchers interested in this area. In this book, Friedrich Schneider and Dominik Enste provide an invaluable resource to researchers and policymakers who are interested in the development of the shadow economy and its effects on the official economy. A particularly noteworthy contribution of this work is its international focus, with discussion of many different countries with economies in varying stages of development.

The first five chapters of the book identify and define the key issues in this area of research and provide the empirical data needed to analyze the shadow economy. Following an introductory chapter, in which the authors identify the key challenges associated with studying the shadow economy, Chapter 2 focuses on defining the shadow economy. Chapter 3 provides a comprehensive summary and critique of research concerning the size of the shadow economy, highlighting the strengths and weaknesses of different methods to estimate the size of the shadow economy. Chapter 4 combines the authors' estimates and previously published findings to estimate the size of the shadow economy in 76 developing, transition, and OECD (Organization for Economic Cooperation and Development) countries as a percentage of gross national product. Finally, Chapter 5 estimates the size of the black market for labor in developing, transition, and OECD countries, estimating the shadow economy work force as a percentage of the population.

Using an integrated approach, combining theories from economics, sociology, and psychology, the next three chapters examine the causes and consequences of the growth in the shadow economy that is documented in Chapters 4 and 5. Chapter 6 describes many different models of deviant behavior that could be used to predict or analyze decisions to engage in illicit work and evade taxes. The authors discuss the merits of the different approaches to this issue, arguing that an integrated model best captures the factors that influence deviant behavior and is, therefore, superior to any model based on a single discipline or theory. This chapter closes with a discussion of the theoretical relationship between tax rates and the size of the shadow economy, illustrated in the context of the Laffer-Curve. In Chapter 7, the authors examine the effect of several factors, including rising tax burdens, the structure of transfer payment systems, the density of regulation, detection probability, and tax morality on the size of the shadow economy. Chapter 8 focuses on the implications of the growing shadow economy for economic and social policy, identifying a number of important consequences of shadow economic activity.

Finally, Chapter 9 offers specific policy recommendations intended to enable the "successful reintegration of 'black' economic activities into the official sector, or at least stop migration into the shadow economy" (p. 179). The "two-pillar" strategy recommended by the authors focuses on decreasing the attractiveness of exiting the official economy and engaging in illicit work, while strengthening the incentives to be an active participant in the political process, contributing to the long-term development of effective economic and social policies. Chapter 10 concludes with a brief summary of the findings and recommendations offered in the book. This is followed by an extensive list of references.

Friedrich Schneider and Dominik Enste's book would be an excellent addition to the reference library of anyone who is interested in taxpayer compliance and the underground economy. It serves as both a summary and a critique of the existing body of research on the measurement of the shadow economy, while providing additional estimates of the size of the shadow economy in developing, transition, and OECD countries. The book is a very good source for research ideas, as the authors make numerous suggestions for additional research throughout the book. Importantly, in analyzing the causes and implications of shadow economic activity, the authors consider the importance of the increased globalization of business and enhanced mobility of the workforce. Finally, while most research in this area has stopped short of offering concrete policy suggestions, this book concludes with specific recommendations to achieve a long-term reversal of the trend of increasing shadow economic activity. This makes the book a "must read" for both policymakers and tax researchers.

CAROL M. FISCHER

Professor

St. Bonaventure University
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Author:Fischer, Carol M.
Publication:Journal of the American Taxation Association
Article Type:Book Review
Date:Mar 22, 2004
Words:763
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