The black 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 include: the shadow economy, cash economy and underground economy.
Participation in the black 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. Community attitudes toward those who fail to meet their tax obligations have hardened in recent years. The pressure for action on the black economy is building.
The black economy also imposes significant costs on the economy and society. Black economy activities undermine trust in the tax system, create an unfair commercial environment that penalises businesses and individuals doing the right thing, can enable and entrench the exploitation of workers, undermine tax revenue and enable abuse of the welfare system.
If left unchecked, black 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 black economy issue – Australia is not alone.
While the black economy is a long-standing problem, new vulnerabilities and threats are emerging as a result of fundamental economic, social and technological changes. Tax and non-tax regulatory burdens, pressure on business margins, the proliferation of new business models (including the sharing economy) and new forms of work, complex interactions with illegal activities and changing social norms are influencing this landscape.