Black economy thrives as austerity cuts deep

Ireland faces a conundrum as it debates efforts to reboot its economy. How much of any recovery will be played out legitimately and how much of it ends up in the grey, dangerous zone known as the black economy?

In the period since the global financial crisis we all know that the cost of being employed legitimately has increased. Increased direct and indirect taxes have made it more costly for employers to legitimately do business and nowhere is this more evident than in the construction sector.

An extended period of brutal declines in year-on- year activity has sapped morale in the building trade. Aside from rapidly falling volumes, wages have declined sharply and many of those employed in the sector are either redundant or have been forced to emigrate.

It is not hard to envisage a degree of bitterness as that saga has unfolded. The manner in which the banking system has struggled amplifies the plight of builders, especially smaller ones. Access to working capital has got tougher and demands for cash down payments linked to credit availability has grown.

Alongside this sector-specific trauma many have grown tired of corruption in certain parts of Irish society, which is itself partly responsible for the struggles that have hit the economy over the past five years.

So, it should be no great surprise that the black economy has reared its ugly head in this milieu. By ignoring official channels and working for cash, some service providers can secure business by effectively undercutting those who tender legitimately for work. In a hard- pressed economy, where consumers value every euro they earn, the temptation to go underground is significant and growing.

Of course, all of this is corrosive and destructive. Those who work legitimately, and faithfully report and absorb all relevant taxes and charges, are being priced out of business by illegitimate operators.

The Exchequer leaks significant amounts of tax revenues as activity levels shift out of the mainstream.

Policing and effective regulatory oversight plays a role in addressing this problem but it fails to be effective if the wedge between legitimate and illegitimate costs widen. This is an argument that lies at the heart of any debate about tax policy.

Those who believe higher taxes help Ireland recover from recession must have answers to the black economy.

In the 1970s, when personal taxes at a marginal level rose to over 70%, not only was it a disincentive to work but it became a powerful boost to the black economy. We risk repeating that mistake as Ireland slowly resumes a growth trajectory that must include sectors such as construction.

We should contemplate a system that lowers tax rates and removes the incentive to game the system. By doing that you have three key effects; (1) it helps lower the cost of business and so stimulates demand; (2) it captures a greater share of the actual market within a legitimate tax code, and; (3) it helps Ireland improve its competitiveness on international markets.

A number cruncher sitting in some ivory tower in Brussels or indeed Dublin could conclude that a succession of tax and charge hikes is an effective way of raising revenues.

That, however, is a static analysis that ignores the way psychology and human behaviour interact with economics. Ordinary people are sick to their back teeth of being told the only way forward is by asking them to pay more. We need a greater level of imagination and realpolitics if recovery is to be sustained and effective.

* Joe Gill is director of Corporate Broking with Goodbody Stockbrokers


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