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A new approach is needed to tackle the underground economy

Montreal, October 30, 2007 – Canada’s underground economy represents about 5% of the country’s gross domestic product, amounting to $75 billion. The underground economy includes goods and services that are produced, exchanged or consumed in violation of the law. These activities are illegal either because the law prohibits production or consumption of the goods or services concerned, as in the case of narcotics (referred to as black markets) or because legal goods or services are exchanged under illegal conditions, for example, renovation work performed by unlicensed workers, or contraband cigarettes (designated as the parallel economy).

Among current public policy issues involving the underground economy, examples include:

  • Widespread tax evasion (nearly 15%) in home construction and renovation.
  • Increasingly high taxes on cigarettes, leading to growth in contraband, just as in the early 1990s when governments had to cut taxes by 80% to eliminate the problem.
  • A federal anti-narcotics strategy resembling the war on drugs in the United States, which swallows phenomenal resources with little apparent effect on drug consumption.

To deal with problems linked to the underground economy, four options can be considered: imposing tougher sanctions, seeking an optimal size for the underground economy, doing nothing, or modifying public policies that form the basis of the underground economy.

“Many current examples suggest that the measures taken to fight the underground economy are ineffective and sometimes even counterproductive,” says Marcel Boyer, vice-president and chief economist of the Montreal Economic Institute. “There is good reason to revise our approach to the underground economy in light of history, economic theory and practical experience.”

The research paper titled The Underground Economy: Causes, Extent, Approaches is available on the Institute’s website. It was prepared by Pierre Lemieux, associate professor in the department of management sciences at the Université du Québec en Outaouais.

Information and interview requests: André Valiquette, Director of Communications, Montreal Economic Institute, Tel.: 514 273-0969 ext. 2225 / Cell: 514 574-0969 / E-mail: avaliquette@iedm.org

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