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Europe’s struggle with underground economy offers lesson for Canada

There is much to like about the Italian way.

During a recent tour of the country, I couldn't help notice the unhurried pace of life. In Rome, there was no early-morning procession of intense, Starbucks-toting office workers; if you want coffee you sit in a café and sip it over a pleasant conversation. So civil.

One night at a restaurant a band was supposed to start playing at 9 p.m. Sure enough, the trio came on, played two songs and then took a dinner break for nearly an hour. It took some arm-twisting by the bar manager to get them back on stage.

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The other thing one observes is the strong preference for cash over credit. Hotels offered discounts if you were willing to pay with rumpled euros instead of your Visa. It was the same with cab drivers, shop owners, you name it. "You don't have cash?" was a refrain I encountered nearly every time I pulled out my plastic to pay.

The Bank of Italy estimated that prior to the financial crisis in 2008, entrepreneurs in the country were evading more than 50 per cent of the taxes they owed. This is largely why Italy has a well-earned reputation as a hotbed of tax cheats and why, too, its economy and finances are in shambles.

According to a government report last year, tax evasion costs Italy around €91-billion ($127-billion) annually. It's been estimated that Italy's "shadow economy" relative to GDP is 21 per cent; that's just behind Greece at 23 per cent. It's a problem that plagues many European countries; one that they are only starting to get serious about addressing now.

It's a subject that the Business Council of British Columbia has been giving some thought to as well.

According to a recent report issued by the council, the size of the underground economy in Canada falls in the range of 5 per cent to 8 per cent of GDP. However, the study suggested that the issue of "unobserved, unreported and untaxed economic activity" was more prevalent in B.C. than the country as a whole.

The council suggested that the reason this was the case was because British Columbia was more heavily weighted toward small, unincorporated businesses and the self-employed, where underground activities are more likely to occur. As well, the construction industry is proportionately larger in B.C. and as a business is historically prone to hide economic activity. Finally, B.C. has a thriving illegal drug industry that generates billions of dollars in untaxed revenue each year.

"Add it all up and it would not be surprising if the overall UE [underground economy] in British Columbia is equivalent to 10 per cent or more of the province's reported GDP," said the report.

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Statistics Canada, which has a much narrower definition of underground economy (it excludes most illegal activities, for instance), estimates that in 2012, the amount of hidden economic action in the country amounted to $42-billion, or about 2.3 per cent of our total GDP. Among provinces, Statscan pegged the underground economy at 3.3 per cent in Prince Edward Island, 2.7 per cent in B.C. and just less than 2 per cent in Alberta.

It's worth noting that the World Bank did its own analysis and concluded that, based on the broadest definition of the term, underground economic activity among a cross-section of advanced industrial countries ranged from 8 per cent to 30 per cent of GDP. It had Canada around the middle with 15.7 per cent, much higher than the Statscan figure.

That, of course, is relatively small potatoes compared with tax-evading reprobates such as Italy and Greece. But it represents a serious systemic problem nonetheless, and if it's increasing then it's something provincial and federal governments need to turn their attention to in a more serious way.

As mentioned, many European countries, including Italy, have made cracking down on tax avoiders a priority. Last year, Italian police pressed charges against more than 13,000 people for suspected tax fraud. Nearly half of those charged had reported no income whatsoever. Police found that nearly 12,000 avoided recording their business dealings on any type of permanent log that could be tracked by government.

Many governments in Europe have allowed this kind of benign criminal behaviour to carry on forever. Now drowning in debt, they can't afford to any longer. Tens of thousands of people are suddenly losing something they long took for granted – the right to cheat the system. It's going to be a painful transition.

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About the Author
National affairs columnist

Gary Mason began his journalism career in British Columbia in 1981, working as a summer intern for Canadian Press. More

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