Decrease in hidden financial transactions, often called "envelope payments," for tax evasion purposes
In 2024, a significant decrease in the proportion of undeclared wages in the commercial sector was observed, potentially marking an important step towards reducing the size of the grey or shadow economy. The decrease, from 18% in 2021 to 13.8% in 2024, is considered a positive development in the ongoing efforts to combat informal employment and tax evasion.
This reduction in undeclared wages may have influenced the gap ratios for payroll taxes and personal income tax. Payroll tax gaps, the difference between payroll taxes owed and collected, have generally shrunk in countries with effective compliance initiatives but remain significant in some regions. The decrease in undeclared wages could lead to increased tax revenues and social protections, as more economic activity moves into the formal sector.
The VID's statement about no increase in the proportion of "envelope wages" in recent years remains valid, providing further evidence of progress against the shadow economy. Envelope wages, or wages paid under the table without official reporting, are a key component of the grey economy.
The decrease in undeclared wages could be attributed to various factors, including enhanced tax administration, digitalization of payroll systems, and enforcement actions. International organizations, such as the OECD and IMF, emphasize the use of technology and data analytics to identify undeclared wages and close payroll tax gaps. This approach has shown measurable declines in informal labor shares in some commercial sectors.
However, it is essential to investigate the causes and potential long-term effects of this decrease in undeclared wages further. The economic situation of recent years, which has been difficult, may have played a role in this decrease. While the decrease is positive, it does not necessarily indicate a complete eradication of the issue.
Reductions in undeclared wages and payroll tax gaps are key indicators of shrinking grey economies. As compliance improves and enforcement tightens, more economic activity moves into the formal sector, increasing tax revenues and social protections. Conversely, persistent underreporting of wages sustains shadow economic activities. The ongoing efforts to reduce undeclared wages and payroll tax gaps are crucial for promoting economic development and ensuring a fair and equitable tax system.
- The reduction in undeclared wages could potentially increase the revenue gained from business sectors, as more economic activities get formalized and subjected to appropriate taxation in the finance industry.
- Given the ongoing efforts to combat informal employment and tax evasion in the industry, the progress made in reducing undeclared wages could lead to expanded social protections and fostering a more equitable financial system.
