This article deals with underground economy as seen through bank intermediation and financial development of tax evasion. The relationship between renders and borrower creates a favorable opportunity for development of underground economy that encourages tax evasion.
The objective of this article is to ascertain the implication of underground economy on countries welfare. The activities carried out in the shadow market may be illegal hence call for informal dealings. Moreover, it would be less beneficial in the event a person follows the proper formal procedures. This market is much dependent on the availability of credit from either the formal sector or informal sector. However, tax collection and public administration, and government intervention is extremely poor hence, the state cannot account for the exact amount of capital in circulation. Renders of funds in the informal sector applies less cost of entry, less information asymmetry prevalent and less punitive repercussions for defaulters. There has been a thin line connecting the informal market to the financial market. This article uses the financial intermediation and tax evasion model to explain the interrelationship between credit market development and underground market. This linkage is very important because it helps come up with economic measures. This ensures that the underground activities contribute to the development of the economy in one way or another.
The document applies the evasion model to aid determine the level of financial intermediation prevalent in the economy. The reason behind this is that there has been little studies or theories developed that connect underground activities to the capital market. One of the assumptions is that shadow market is full of renders and borrowers ready to engage in financial contracts that are informal in nature. These kinds of contracts are attributed to the willingness or goodwill of both parties to act in a manner that facilitates the ordeal. Financial institution acts as intermediaries through which the sector operates. Between the consumers of these services and the financial market we have the agents. These agents are responsible for the provision and availing the funds to the informal sector. The agents are in different sections where they operate as lenders by investing money in financial market and informal market. They are ready to risk money which is deemed to yield profit which is not taxed by the government. Funds invested in the formal sector are subject to tax hence unattractive to investors. In addition, most of the activities in this market are illegal and would attract legal bodies to investigate the formalities followed in conducting the ordeal. Banks therefore have no estimation of the real wealth of these agents who control almost every activities going on in the shadow industry. Corruption forms part and parcel of this industry hence denies the economy huge amount of tax that could otherwise be used in developing the country (Blackburn, Bose, and Capasso 251).
The central concept is about tax evasion by agents. The lending and borrowing is highly influenced by agents declared financial asset position. The undeclared wealth is not catered for or featured in the tax bracket. Income derived from the organized market is taxed at the same rate despite coming from different sources. This discourages the agents from declaring their wealth to the state that applies a progressive tax rate. These concepts are clearly defined in the article and explicitly explain issues that pertain to the level of financial dependency between different sections (Blackburn, Bose, and Capasso 249).
The central argument is about tax evasion through this kind of an economy. The article tries to transpose through these activities and their benefit to various social groups in the country. Informal economy is a norm to those people who evade paying taxes to government or are taxed more on items they purchases or trade regularly in many countries in the world. Higher taxes discourage people and traders from borrowing. This is because taxes eats into the profit an organization or individual is determined to make after engaging in an income generating endeavor. The economic factor that affects individual agent’s decisions concerning investment includes intermediation costs and underground investment returns. The hypotheses made are as follows. First, the rate of return derived from these activities represents a decreasing function as compared to the funds channeled into this particular economy. Secondly, agents employ specialist to guide them in the management of finances. The experts make good use of the prevailing market condition to advance their lending initiatives. This document makes very specific argument about these issues (Blackburn, Bose, and Capasso 250).
The method applied in the study is qualitative and comparative analysis between different economies in the world. This is in consideration to the availability and number of agents working on individual economies. It helps arrive at a formidable conclusion for the study conducted.
To support the study, the article focuses on the economic model using equilibrium tax evasion to make plausible discussion. Agent’s contribution and disclosure of their financial position is a factor of the tax imposed or exercised. The evidence is adequate in explaining the situation that exists in all countries.
The value positions are clearly brought out and represented in this document. One of the positions is that of the economic decision adopted and implemented by agents. Another position is about the disclosure activities and the employment of qualified personnel’s to advice and controls the investment and capital management. Each and every position is dealt with from all corners in terms of economic decisions.
This work is complimentary to other research done on this topic. By making constant and wide consultation and referencing to previous studies, the articles context fits in this field. The research findings support the underlying issues that inhibit wealth disclosure as well as the linkage hitherto.
This particular work is very influential and adds up to the previous work on the same subject carried out by different researchers. This journal offer insightful knowledge on the mechanism and working of the underground market that is less controlled by the government (Blackburn, Bose, and Capasso 245).
This journal is well writing in a topical manner which helps in easy understanding of the paper. The incorporation of equilibrium graph helps explain as well as give visual representation of the ordeal. This style is appropriate as it emphasizes on the mechanism and processes in the market as observed by the authors.
In conclusion, a business operation that goes on in the underground market has a lot to do with the economic policies that enhance the accessibility of credit facilities to the community. Public administration and its efficiency is also an influential matter to the spread of this economic phenomenon. Good and efficient measures in the administration encourages disclosure while the vice versa is true. The end result is increased revenue collected hence increased economic development.
Blackburn, Keith, Niloy Bose, and Salvatore Capasso. “Tax evasion, the underground economy and financial development.” Journal of Economic Behavior & Organization 83.2 (2012): 243-253. Print.