ACADEMIC RESEARCH IN MODERN SCIENCE
International scientific-online conference
47
POSITIVE CONTRIBUTION OF REDUCING THE HIDDEN ECONOMY
TO BUDGET REVENUES
Abdullayev Shavkat Nasriddinovich
Deputy Director of "Polimer and cable trade" LLC
https://doi.org/10.5281/zenodo.15385409
Abstract:
the underground economy, often manifested in unreported
income and unofficial activity, poses significant challenges to national budgets
and economic stability. In the past several years, there has been a heightened
awareness of the desire to reduce the underground economy, leading to
enhanced budget revenues. This paper discusses the advantages of decreasing
the hidden economy for the government treasury, explaining the potential for
increased tax revenues, improved public services, and greater economic
transparency. The paper outlines many techniques that can be employed to
move informal activities into the formal economy and reflects on the socio-
economic benefits resulting from such a shift. Lastly, reduction of the hidden
economy is posed as a precondition for long-term sustainable economic growth
and social equity.
Keywords:
hidden economy, budget revenues, informal sector, tax
compliance, economic transparency, public services, socio-economic
development.
Introduction
The hidden economy, or informal economy, or shadow economy, is a wide
range of economic activities occurring beyond the official regulatory framework.
They may include undeclared incomes, unregistered employment, and other
activities that are not captured in national accounts. The underground economy
can provide short-run financial benefits to households and firms but severely
undermines governments' capacity to tax and spend on public activities. As
governments grapple with the demands of rising populations and shrinking
budgets, the need to address the hidden economy has never been more urgent.
1
The aim of this article is to discuss the positive impacts that can be expected
from a decrease in the hidden economy and how such decreases translate into
higher budget revenues. By taking into account the interrelationships between
formalization, tax compliance, and public investment, we can more easily think
about how using solutions to the issues posed by the hidden economy can be
employed to stimulate economic growth and increase the welfare of society.
Main Part
ACADEMIC RESEARCH IN MODERN SCIENCE
International scientific-online conference
48
The hidden economy, otherwise referred to as the informal or shadow
economy, is all economic activity that occurs outside the state-controlled sphere.
This sector is famously known to be opaque and unaccountable, leading to
significant revenue losses to governments across the globe. Because the
economies are tottering under the recent world shocks and chronic maladies,
the need to attack the hidden economy has become increasingly urgent.
Governments can tap immense untapped resources of wealth, which can
considerably bolster budget revenues and thereby finance public services and
infrastructure development, by weakening the shadow economy.
2
The hidden economy operates through myriad activities such as
unregistered firms, undeclared income, and off-the-books employment
agreements. Such activity is often in a position to evade taxes and regulatory
oversight, leaving a considerable gap in the public coffers. The International
Labour Organization places the estimate at between 60 to 80% of employees in
developing economies working in the informal economy, meaning a major
portion of work is not covered in official estimates. Through this integration of
such workers and firms into the open economy, tax bases can be expanded by
the government, yielding more revenues which can be spent on financing public
investment and social programs.
It is perhaps most self-evident that contracting the hidden economy will
allow raising tax revenues. When people and firms disclose income,
governments are in a position to impose taxes that finance the public. This can
be particularly important for developing countries, where budget deficits are
likely to slow down social and economic growth. By tax reform and enhanced
compliance, governments can potentially close the revenue gap that emerges
from the hidden economy. This can include having more straightforward tax
regimes that are less onerous for small firms to comply with, thereby promoting
formalization rather than triggering avoidance. Besides, the transition from
casual to formal employment has the potential to create a virtuous cycle that not
only increases tax revenues but also improves economic stability. Formal
employment provides employees with legal protection, privileges, and social
security access. Such advantages increase the household disposable income,
which further increases consumption and drives economic growth. As more
companies and individuals are incorporated into the formal economy, they
contribute higher revenues to tax, broadening the tax base, which in turn is
ACADEMIC RESEARCH IN MODERN SCIENCE
International scientific-online conference
49
utilized for investment in social programs, public services, and infrastructure,
creating a loopback effect on the economy.
3
In addition to increasing revenues to the budget, curbing the hidden
economy also contributes to good governance and accountability of economic
activity. A clean and regulated business environment discourages corruption
and criminal enterprises that thrive in secrecy. As more business is done legally,
governments can put in place improved regulations that encourage fair market
conduct. This inspires investor confidence and a more competitive economic
climate, which ultimately leads to sustainable growth and development. In
addition, the decline of the hidden economy will help level the playing field for
formal enterprises. Informal enterprises have lower costs of production since
they do not pay taxes and regulatory fees, hence creating a type of unfair
competition for legally registered enterprises. Formalization will help
governments ensure a more equitable market place where all enterprises are
treated equally under the same terms and conditions. This not only protects
legitimate business but also fosters consumer confidence and security, which is
vital for an economy to flourish.
The consequences of a declining hidden economy extend beyond budgetary
revenues and equal competition; they also have an impact on social equity. The
majority of informal workers are deprived of access to basic services such as
education, health, and pension benefits. Through the formalization of such
workers, the government will be able to provide them with access to social
safety nets and services that enhance the quality of life. Financial stability
through access can empower people, reduce levels of poverty, and create a
healthier population, thus further developing the state by reducing healthcare
expenditure and enhancing productivity.
4
Education and awareness are imperative in advancing the formalization of
informal activity. Governments can also invest in programs that educate
business owners about the benefits of running their businesses legally, such as
access to credit and legitimacy in the marketplace. Attempts to simplify
registration and reduce red tape can entice informal businesses to enter the
formal sector. By creating a climate conducive to the formal sector entry of small
businesses, governments can considerably boost budget revenues while
fostering economic resilience.
Finally, the positive impacts of curbing the hidden economy on budget
revenues are many and deep. By boosting tax compliance, strengthening
ACADEMIC RESEARCH IN MODERN SCIENCE
International scientific-online conference
50
economic stability, encouraging fair competition, and developing social equity,
governments can unlock the enormous potential of their informal sectors for the
good of all. In the future, policymakers need to orient themselves towards
policies that stimulate formalization, thus transforming the underground
economy into a source of income and social growth. In this way, nations do not
only expand their revenues from the budget but also create the foundation for
sustainable economic progress and a more equitable society.
Conclusion
Lastly, reducing the hidden economy is one of the most important areas
where governments can boost budget revenues and increase the overall health
of the economy. By implementing policies that will lead to the formalization of
informal activities, governments can not only increase tax revenues but also
make public services of better quality and wider availability. The benefits of
reducing the hidden economy extend beyond the immediate fiscal gains; they
pave the way for more transparency, fairness, and social justice. As countries
navigate the realities of the modern economic landscape, prioritization of
formalizing the underground economy will emerge in advancing sustainable
development, activating investment, and ultimately benefiting the interests of
society as a whole.
References:
1.
Frey, B. S., & Pommerehne, W. W. (1984). The hidden economy: state and
prospects for Measurement 1. Review of income and Wealth, 30(1), 1-23.
2.
Buehn, A., & Schneider, F. (2012). Shadow economies around the world:
novel insights, accepted knowledge, and new estimates. International tax and
public finance, 19, 139-171.
3.
Buehn, A., & Schneider, F. (2012). Shadow economies around the world:
novel insights, accepted knowledge, and new estimates. International tax and
public finance, 19, 139-171.
4.
Radu, C. F., Dumiter, F. C., Dudaș, L., & Jimon, Ș. (2017). Study On Budget
Revenue Collection, Shadow Economy and Tax Losses Caused By It. Studia
Universitatis Vasile Goldiș Arad, Seria Științe Economice, 27(2), 1-18.
