The shadow economy refers to people who operate entirely outside the tax and regulatory system or who are known to the authorities but do not correctly report their tax obligations.
It encompasses a wide range of practices, including understatement of takings, the payment and acceptance of cash wages off the books, welfare fraud, sharing economy contractors not declaring their income, moonlighting and phoenixing (where businesses deliberately liquidate to avoid paying employees and creditors). Complex interactions with illegal activities, including money laundering, must also be taken into account.
Other terms used to refer to the shadow economy include: the black economy, cash economy, underground economy or the cheating economy. ‘Shadow economy’ is now the preferred term to reflect the Organisation for Economic Co‑operation and Development’s (OECD) definition of unreported or dishonest economic activity.
Participation in the shadow economy penalises honest taxpayers, undermines the integrity of Australia's tax and welfare systems and creates an uneven playing field for the majority of small businesses doing the right thing.
If left unchecked, shadow economy participation can lead to a dangerous dynamic. It can foster a culture which legitimises and supports this participation, spurring its further growth. As revenues fall, those remaining in the formal economy may be faced with higher tax burdens, providing a greater incentive to move into the shadows. All other OECD countries are grappling with the shadow economy issue – Australia is not alone.
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