Assessment of economic capacity based on GDP inclusive of the shadow economy
Assessment of deficits on the basis of tax spending including uncollected tax as if it is a budgeted tax spend
A requirement that this spend be controlled like all others
The pre-condition of accepting this goal
There has been a reluctance to tackle this issue
This is based on the widespread belief that if the tax gap is tackled the economic activity brought within the scope to tax will be lost altogether
This is not true. Microeconomic theory says that markets work best to maximise social well-being when there is a level playing field on which all market participants compete
The tax gap destroys that level playing field. The result must be that markets deliver sub-optimal results because of misinformation, distorted rates of return, misapplication of capital and reduced productivity
Closing the tax gap will overcome these market defects. Accepting this market based argument is the pre-condition for change in the convergence criteria
Government deficits under the Maastricht criteria should be measured as if government is collecting the tax it cannot collect.
Sheesh. So Greece is just fine then, eh?
The distortions of the tax gap are also fun. For that’s the wrong way around. It’s the taxation itself which is the distortion in the first place. Maybe a necessary one, of course, but still a distortion which creates misapplications and reductions.