Economic freedom is the key to reducing shadow economics

Reduced, if only figuratively, to shaking the dust from their piggy banks, government financial types from California to Cardiff have turned their eyes to that ever-elusive dream: Dragging those who have fled into the shadow economy back out into the open where they can be induced to keep the machinery of the state running just a little bit longer. Is there enough money out there to merit the taxman’s interest? Almost certainly; California officials are salivating over the prospect of $7 billion in revenue, while the European Commission estimates that €2 trillion is hiding out there. Can the taxman actually collect any of that money? Well … That’s another question entirely. Left largely unasked by government officials, though, is this: Why have so many of their subjects chosen to operate in the shadows, forsaking the protections of legal status and effectively painting large targets on their backs? Could governments be chasing away the objects of their interest with excessive attention?
First of all, what do we mean by “shadow economy”? Are we talking hookers and blow? Black market plutonium? Human organs illegally harvested from nightclubbers left abandoned in tubs of ice in Newark motels? Not at all—that’s all separate and in addition to the shadow sector. Friedrich Schneider, chair of the Department of Economics at Johannes Kepler Universitat in Linz-Auhof, Austria, and one of the world’s foremost experts on “shadow” economic activity, put forward his widely accepted definition of such activity in a 2010 paper for the World Bank co-authored with Andreas Buehn and Claudio E. Montenegro:

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