Underground economy accounts for 17% of GDP

By Kang Seung-woo

The size of the country’s underground economy has been reducing in past years thanks to improving transparency in financial transactions, a government report said Friday.

According to the Korea Institute of Public Finance (KIPF), the untaxed portion of the economy accounted for around 17.1 percent of the gross domestic product (GDP) in 2008, down from around 29 percent in 1990s and 24 percent in the 2000s.

In describing the so-called underground economy, KIPF refers to tax-related irregularities and below-the-radar economic activities that aren’t included in official economic statistics, such wealth generated from unlawful business operations related to drugs and product smuggling.

The state-funded tax research center estimated that business entities in the country hid up to 29 trillion won ($25.9 billion) worth of revenue in 2008, equal to 3.1 percent of the country’s overall economic size.

The KIPF said that a series of measures to boost transparency of financial transactions, including a scheme for real name-based financial transactions, helped to scale back the size of the underground in the nation.

“The government should redouble efforts to boost transparency by encouraging the use of credit cards,” the report said.

Also, an increased use of cash receipts will result in an improvement in tax sources, which will in turn increase overall tax income, it added.

A large shadow economy is a serious problem that should be tackled. Its growth triggers a vicious cycle that could eventually weaken the official economy.

More tax evasion due to unrecorded market activities results in lower tax revenues, triggering the government to raise tax rates and try to collect more from other areas. That would encourage even more hush-hush transactions, leading the government to further budget constraints.