Will the new government overcome the shadow economy? An article by Volodymyr Dubrovsky, senior economist at CASE Ukraine, for “Economic Truth” on how to reduce the level of shadow in the economy.
Key points:
How much “shadow” is real in Ukraine
The official estimate of the Ministry of Economy (30%) is still relevant in 2021. After the start of a full-scale war, there is only a verbal mention of “about 40%. ” Ernst & Young estimated the cash “shadow” in 2023 at less than 20%, but this part describes only the tip of the iceberg – small businesses and cash payments. The bulk of the evasion is formed by completely different mechanisms.
Comparison with other countries
In developed countries, the shadow economy usually makes up 10–15% of GDP – this is an unrealistic bar for Ukraine. Even countries with similar quality of state institutions keep at the level of 20–25%. If Ukraine reduced the shadow economy to at least this level, the budget could receive +400–500 billion UAH annually.
Why de-shadowing is not about individual entrepreneurs
In Ukraine, the main budget losses are not caused by small businesses, but by large companies that use complex chains of evasion, “conversion centers” and fictitious documents. This is where the real “big money” circulates, and not in the sphere of micro-entrepreneurship. Therefore, the focus of IMF consultants on a simplified taxation system is wrong. Small business in the shadow is more a consequence than a cause.
Why fiscalization does not work
The persecution of small points of sale is ineffective: there are hundreds of thousands of them, while the sources of origin of “left” goods are only a few dozen. Pressure on micro-business does not destroy large schemes, but only complicates legal self-employment and stimulates even greater withdrawal into the shadows.
Real problems
1. The “envelope” industry is a criminalized business mechanism that operates under the “roof” of law enforcement agencies. It has existed for decades and adapts to each new reform.
2. The corporate culture of the tax service since the 1990s is repressive and focused not on increasing revenues, but on “manual management” of business and maintaining old schemes. Not surprisingly, according to a CASE Ukraine survey, only 22.2% of entrepreneurs believe that the tax service is really fighting schemes, and 27.5% are convinced that it “covers” them.
Conclusion
Collecting an additional 60 billion UAH is possible, but only if it hits the “upper” shadow, and not by strengthening control over individual entrepreneurs. Successful de-shadowing = dismantling envelopes + changing the logic of the tax service’s work, and not another pressure on small businesses.
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