Some call it the "unofficial" or "informal" economy,
others call it the "grey economy" but the old name fits it
best: the "black economy". In the USA "black" means
"profitable, healthy" and this is what the black economy
is. Macedonia should count its blessings for having had a
black economy so strong and thriving to see it through the
transition. If Macedonia had to rely only on its official
economy it would have gone bankrupt long ago.
The black economy is made up of two constituent
activities:
1. Legal activities that are not reported to the tax
authorities and the income from which goes
untaxed and unreported. For instance: it is not
illegal to clean someone's house, to feed people or
to drive them. It is, however, illegal to hide the
income generated by these activities and not to pay
tax on it. In most countries of the world, this is a
criminal offence, punishable by years in prison.
2. Illegal activities which, needless to say, are also
not reported to the state (and, therefore, not taxed).
These two types of activities together are thought to
comprise between 15% (USA, Germany) to 60% (Russia)
of the economic activity (as measured by the GDP),
depending on the country. It would probably be an
underestimate to say that 40% of the GDP in Macedonia
is "black". This equals 1.2 billion USD per annum. The
money generated by these activities is largely held in
foreign exchange outside the banking system or smuggled
abroad (even through the local banking system).
Experience in other countries shows that circa 15% of the
money "floats" in the recipient country and is used to
finance consumption. This should translate to 1 billion
free floating dollars in the hands of the 2 million citizens
of Macedonia. Billions are transferred to the outside world
(mostly to finance additional transactions, some of it to be
saved in foreign banks away from the long hand of the
state). A trickle of money comes back and is "laundered"
through the opening of small legal businesses.
These are excellent news for Macedonia. It means that
when the macro-economic, geopolitical and (especially)
the micro-economic climates will change - billions of
USD will flow back to Macedonia. People will bring their
money back to open businesses, to support family
members and just to consume it. It all depends on the
mood and on the atmosphere and on how much these
people feel that they can rely on the political stability and
rational management. Such enormous flows of capital
happened before: in Argentina after the Generals and their
corrupt regime were ousted by civilians, in Israel when
the peace process started and in Mexico following the
signature of NAFTA, to mention but three cases. These
reserves can be lured back and transform the economy.
But the black economy has many more important
functions.
The black economy is a cash economy. It is liquid and
fast. It increases the velocity of money. It injects much
needed foreign exchange to the economy and
inadvertently increases the effective money supply and the
resulting money aggregates. In this sense, it defies the
dictates of "we know better" institutions such as the IMF.
It fosters economic activity and employs people. It
encourages labour mobility and international trade. Black
economy, in short, is very positive. With the exception of
illegal activities, it does everything that the official
economy does - and, usually, more efficiently.
So, what is morally wrong with the black economy? The
answer, in brief: it is exploitative. Other parts of the
economy, which are not hidden (though would have liked
to be), are penalized for their visibility. They pay taxes.
Workers in a factory owned by the state or in the
government service cannot avoid paying taxes. The
money that the state collects from them is invested, for
instance, in infrastructure (roads, phones, electricity) or
used to pay for public services (education, defence,
policing). The operators of the black economy enjoy these
services without paying for them, without bearing the
costs and worse: while others bear the costs. These
encourages them, in theory to use these resources less
efficiently.
And all this might be true in a highly efficient, almost
ideal market economy. The emphasis is on the word
"market". Unfortunately, we all live in societies which are
regulated by bureaucracies which are controlled (in
theory, rarely in practice) by politicians. These elites have
a tendency to misuse and to abuse resources and to
allocate them in an inefficient manner. Even economic
theory admits that any dollar left in the hands of the
private sector is much more efficiently used than the same
dollar in the hands of the most honest and well meaning
and well planning civil servant. Governments all over the
world distort economic decisions and misallocate scarce
economic resources.
Thus, if the goals are to encourage employment and
economic growth - the black economy should be
welcomed. This is precisely what it does and, by
definition, it does so more efficiently than the
government. The less tax dollars a government has - the
less damage it does. This is an opinion shares by most
economists in the world today. Lower tax rates are an
admission of this fact and a legalization of parts of the
black economy.
The black economy is especially important in times of
economic hardships. Countries in transition are a private
case of emerging economies which are a private case of
developing countries which used to be called (in less
politically correct times) "Third World Countries". They
suffer from all manner of acute economic illnesses. They
lost their export markets, they are technologically
backward, their unemployment skyrockets, their plant and
machinery are dilapidated, their infrastructure decrepit
and dysfunctional, they are lethally illiquid, they become
immoral societies (obligations not honoured, crime
flourishes), their trade deficits and budget deficits balloon
and they are conditioned to be dependent on handouts and
dictates from various international financial institutions
and donor countries.
Read this list again: isn't the black economy a perfect
solution until the dust settles?
It enhances exports (and competitiveness through
imports), it encourages technology transfers, it employs
people, it invests in legitimate businesses (or is practised
by them), it adds to the wealth of the nation (black
marketeers are big spenders, good consumers and build
real estate), it injects liquidity to an otherwise dehydrated
market. Mercifully, the black economy is out of the reach
of zealous missionaries such as the IMF. It goes its own
way, unnoticed, unreported, unbeknownst, untamed. It
doesn't pay attention to money supply targets (it is much
bigger than the official money supply figure), or to
macroeconomic stability goals. It plods on: doing business
and helping the country to survive the double scourges of
transition and Western piousness and patronizing. As long
as it is there, Macedonia has a real safety net. The
government is advised to turn a blind eye to it for it is a
blessing in disguise.
There is one sure medicine: eliminate the population and
both unemployment and inflation will be eliminated.
Without the black economy, the population of Macedonia
would not have survived. This lesson must be
remembered as the government prepares to crack down on
the only sector of the economy which is still alive and
kicking.
Operational Recommendations
The implementation of these recommendations and
reforms should be obliged to be GRADUAL. The
informal economy is an important pressure valve for the
release of social pressures, it ameliorates the social costs
inherent to the period of transition and it constitutes an
important part of the private sector.
As we said in the body of our report, these are the reasons
for the existence of an informal economy and they should
be obliged to all be tackled:
? High taxation level (in Macedonia, high payroll
taxes);
? Onerous labour market regulations;
? Red tape and bureaucracy (which often leads to
corruption);
? Complexity and unpredictability of the tax system.
Reporting Requirements and Transparency
? All banks should be obliged to report foreign
exchange transactions of more than 10,000 DM
(whether in one transaction or cumulatively by the
same legal entity). The daily report should be
submitted to the Central Bank. In extreme cases,
the transactions should be investigated.
? All the ZPP account numbers of all the firms in
Macedonia should be publicly available through
the Internet and in printed form.
? Firms should be obliged by law to make a list of
all their bank accounts available to the ZPP, to the
courts and to plaintiffs in lawsuits.
? All citizens should be obliged to file annual,
personal tax returns (universal tax returns, like in
the USA). This way, discrepancies between
personal tax returns and other information can lead
to investigations and discoveries of tax evasion
and criminal activities.
? All citizens should be obliged to file bi-annual
declarations of personal wealth and assets
(including real estate, vehicles, movables,
inventory of business owned or controlled by the
individual, financial assets, income from all
sources, shares in companies, etc.).
? All retail outlets and places of business should be
required to install - over a period of 3 years - cash
registers with "fiscal brains". These are cash
registers with an embedded chip. The chips are
built to save a trail (detailed list) of all the
transactions in the place of business. Tax
inspectors can pick the chip at random, download
its contents to the tax computers and use it to issue
tax assessments. The information thus gathered
can also be crossed with and compared to
information from other sources (see: "Databases
and Information Gathering"). This can be done
only after the full implementation of the
recommendations in the section titled "Databases
and Information Gathering". I do not regard it as
an effective measure. While it increases business
costs - it is not likely to prevent cash or otherwise
unreported transactions.
? All taxis should be equipped with taximeters,
which include a printer. This should be a licencing
condition.
? Industrial norms (for instance, the amount of sugar
needed to manufacture a weight unit of chocolate,
or juice) should be revamped. Norms should NOT
be determined according to statements provided by
the factory - but by a panel of experts. Each norm
should be signed by three people, of which at least
one is an expert engineer or another expert in the
relevant field. Thought should be dedicated to the
possibility of employing independent laboratories
to determine norms and supervise them.
? Payments in wholesale markets should be done
through a ZPP counter or branch in the wholesale
market itself. Release of the goods and exiting the
physical location of the wholesale market should
be allowed only against presentation of a ZPP
payment slip.
Reduction of Cash Transactions
? Cash transactions are the lifeblood of the informal
economy. Their reduction and minimization is
absolutely essential in the effort to contain it. One
way of doing it is by issuing ZPP payment (debit)
cards to businesses, firm and professionals. Use of
the payment cards should be mandatory in certain
business-to-business transactions.
? All exchange offices should be obliged to issue
receipt for every cash transaction above 100 DM
and to report to the Central Bank all transactions
above 1000 DM. Suspicious transactions (for
instance, transactions which exceed the financial
wherewithal of the client involved) should be duly
investigated.
? The government can reduce payroll taxes if the
salary is not paid in cash (for instance, by a
transfer to the bank account of the employee). The
difference between payroll taxes collected on cash
salaries and lower payroll taxes collected on
noncash salaries - should be recovered by
imposing a levy on all cash withdrawals from
banks. The banks can withhold the tax and transfer
it to the state monthly.
? Currently, checks issued to account-holders by
banks are virtually guaranteed by the issuing
banks. This transforms checks into a kind of cash
and checks are used as cash in the economy. To
prevent this situation, it is recommended that all
checks will be payable to the beneficiary only. The
account-holder will be obliged to furnish the bank
with a monthly list of checks he or she issued and
their details (to whom, date, etc.). Checks should
be valid for 5 working days only.
? An obligation can be imposed to oblige businesses
to effect payments only through their accounts
(from account to account) or using their debit
cards. Cash withdrawals should be subject to a
withholding tax deducted by the bank. The same
withholding tax should be applied to credits given
against cash balances or to savings houses
(stedilnicas). Alternatively, stedilnicas should also
be obliged to deduct, collect and transfer the cash
withdrawal withholding tax.
? In the extreme and if all other measures fail after a
reasonable period of time, all foreign trade related
payments should be conducted through the Central
Bank. But this is really a highly irregular,
emergency measure, which I do not recommend at
this stage.
? The interest paid on cash balances and savings
accounts in the banks should be increased (starting
with bank reserves and deposits in the central
bank).
? The issuance of checkbook should be made easy
and convenient. Every branch should issue
checkbooks. All the banks and the post office
should respect and accept each other's checks.
? A Real Time Gross Settlement System should be
established to minimize float and facilitate
interbank transfers.
Government Tenders
? Firms competing for government tenders should
be obliged to acquire a certificate from the tax
authorities that they owe no back-taxes.
Otherwise, they should be barred from bidding in
government tenders and RFPs (Requests for
Proposals).
Databases and Information Gathering
? Estimating the informal economy should be a
priority objective of the Bureau of Statistics,
which should devote considerable resources to this
effort. In doing so, the Bureau of Statistics should
coordinate closely with a wide variety of relevant
ministries and committees that oversee various
sectors of the economy.
? All registrars should be computerized: land, real
estate, motor vehicles, share ownership,
companies registration, tax filings, import and
export related documentation (customs), VAT,
permits and licences, records of flights abroad,
ownership of mobile phones and so on. The tax
authorities and the Public Revenue Office (PRO)
should have unrestricted access to ALL the
registers of all the registrars. Thus, they should be
able to find tax evasion easily (ask for sources of
wealth- how did you build this house and buy a
new car if you are earning 500 DM monthly
according to your tax return?).
? The PRO should have complete access to the
computers of the ZPP and to all its computerized
and non-computerized records.
? The computer system should constantly compare
VAT records and records and statements related to
other taxes in order to find discrepancies between
them.
? Gradually, submissions of financial statements, tax
returns and wealth declarations should be
computerized and done even on a monthly basis
(for instance, VAT statements).
? A system of informants and informant rewards
should be established, including anonymous phone
calls. Up to 10% of the intake or seizure value
related to the information provided by the
informant should go to the informant.
Law Enforcement
? Tax inspectors and customs officials should
receive police powers and much higher salaries
(including a percentage of tax revenues). The
salaries of all tax inspectors - regardless of their
original place of employment - should be
equalized (of course, taking into consideration
tenure, education, rank, etc.).
? Judges should be trained and educated in matters
pertaining to the informal economy. Special courts
for taxes, for instance, are a good idea (see
recommendation below). Judges have to be trained
in tax laws and the state tax authorities should
provide BINDING opinions to entrepreneurs,
businessmen and investors regarding the tax
implications of their decisions and actions.
? It is recommended to assign tax inspectors to the
public prosecutors' office to work as teams on
complex or big cases.
? To establish an independent Financial and Tax
Police with representatives from all relevant
ministries but under the exclusive jurisdiction of
the PRO. The remit of this Police should include
all matters financial (including foreign exchange
transactions, property and real estate transactions,
payroll issues, etc.).
? Hiring and firing procedures in all the branches of
the tax administration should be simplified. The
number of administrative posts should be reduced
and the number of tax inspectors and field agents
increased.
? Tax arrears and especially the interest accruing
thereof should be the first priority of the ZPP,
before all other payments.
? All manufacturers and sellers of food products
(including soft drinks, sweetmeats and candy,
meat products, snacks) should purchase a licence
from the state and be subjected to periodic and
rigorous inspections.
? All contracts between firms should be registered in
the courts and stamped to become valid. Contracts
thus evidenced should be accompanied by the
registration documents (registrar extract) of the
contracting parties. Many "firms" doing business
in Macedonia are not even legally registered.
Reforms and Amnesty
? A special inter-ministerial committee with
MINISTER-MEMBERS and headed by the PM
should be established. Its roles: to reduce
bureaucracy, to suggest appropriate new
legislation and to investigate corruption.
? Bureaucracy should be pared down drastically.
The more permits, licences, tolls, fees and
documents needed - the more corruption. Less
power to state officials means less corruption. The
One Stop Shop concept should be implemented
everywhere.
? A general amnesty should be declared. Citizens
declaring their illegal wealth should be pardoned
BY LAW and either not taxed or taxed at a low
rate once and forever on the hitherto undeclared
wealth.
The Tax Code
? To impose a VAT system. VAT is one the best
instruments against the informal economy because
it tracks the production process throughout a chain
of value added suppliers and manufacturers.
? The Tax code needs to be simplified. Emphasis
should be placed on VAT, consumption taxes,
customs and excise taxes, fees and duties. To
restore progressivity, the government should
directly compensate the poor for the excess
relative burden.
? After revising the tax code in a major way, the
government should declare a moratorium on any
further changes for at least four years.
? The self-employed and people whose main
employment is directorship in companies should
be given the choice between paying a fixed % of
the market value of their assets (including
financial assets) or income tax.
? All property rental contracts should be registered
with the courts. Lack of registration in the courts
and payment of a stamp tax should render the
contract invalid. The courts should be allowed to
evidence and stamp a contract only after it carries
the stamp of the Public Revenue Office (PRO).
The PRO should register the contract and issue an
immediate tax assessment. Contracts, which are
for less than 75% of the market prices, should be
subject to tax assessment at market prices. Market
prices should be determined as the moving average
of the last 100 rental contracts from the same
region registered by the PRO.
? Filing of tax returns - including for the self-
employed - should be only with the PRO and not
with any other body (such as the ZPP).
Legal Issues
? The burden of proof in tax court cases should shift
from the tax authorities to the person or firm
assessed.
? Special tax courts should be established within the
existing courts. They should be staffed by
specifically trained judges. Their decisions should
be appealed to the Supreme Court. They should
render their decisions within 180 days. All other
juridical and appeal instances should be cancelled
- except for an appeal instance within the PRO.
Thus, the process of tax collection should be
greatly simplified. A tax assessment should be
issued by the tax authorities, appealed internally
(within the PRO), taken to a tax court session (by a
plaintiff) and, finally, appealed to the Supreme
Court (in very rare cases).
? The law should allow for greater fines, prison
terms and for the speedier and longer closure of
delinquent businesses.
? Seizure and sale procedures should be specified in
all the tax laws and not merely by way of
reference to the Income Tax Law. Enforcement
provisions should be incorporated in all the tax
laws.
? To amend the Law on Tax Administration, the
Law on Personal Income Tax and the Law on
Profits Tax as per the recommendations of the IRS
experts (1997-9).
Customs and Duties
? Ideally, the customs service should be put under
foreign contract managers. If this is politically too
sensitive, the customs personnel should be entitled
to receive a percentage of customs and duties
revenues, on a departmental incentive basis. In any
case, the customs should be subjected to outside
inspection by expert inspectors who should be
rewarded with a percentage of the corruption and
lost revenues that they expose.
? In the case of imports or payments abroad,
invoices, which include a price of more than 5%
above the list price of a product, should be rejected
and assessment for the purposes of paying customs
duties and other taxes should be issued at the list
price.
? In the case of exports or payments from abroad,
invoices which include a discount of more than
25% on the list price of a product should be
rejected and assessment for the purposes of paying
customs duties and other taxes should be issued at
the list price.
? The numbers of tax inspectors should be
substantially increased and their pay considerably
enhanced. A departmental incentive system should
be instituted involving a percentage of the intake
(monetary fines levied, goods confiscated, etc.).
? The computerized database system (see
"Databases and Information Gathering") should be
used to compare imports of raw materials for the
purposes of re-export and actual exports (using
invoices and customs declarations). Where there
are disparities and discrepancies, severe and
immediate penal actions should be taken. Anti-
dumping levies and measures, fines and criminal
charges should be adopted against exporters
colluding with importers in hiding imported goods
or reducing their value.
? Often final products are imported and declared to
the customs as raw materials (to minimize customs
duties paid). Later these raw materials are either
sold outright in the domestic or international
markets or bartered for finished products (for
example: paints and lacquers against furniture or
sugar against chocolate). This should be a major
focus of the fight against the informal economy. I
follow with an analysis of two products, which are
often abused in this manner.
? I study two examples (white sugar and cooking
oil) though virtually all raw materials and foods
are subject to the aforementioned abuse.
? White Sugar is often imported as brown sugar.
One way to prevent this is to place sugar on the list
of LB (import licence required) list, to limit the
effective period of each licence issued, to connect
each transaction of imported brown sugar to a
transaction of export, to apply the world price of
sugar to customs duties, to demand payment of
customs duties in the first customs terminal, to
demand a forwarder's as well as an importer's
guarantee and to require a certificate of origin. The
same goes for Cooking Oil (which - when it is
imported packaged - is often declared as some
other goods).
? All payments to the customs should be made only
through the ZPP. Customs and tax inspectors
should inspect these receipts periodically.
? All goods should be kept in the customs terminal
until full payment of the customs duties, as
evidenced by a ZPP receipt, is effected.
Public Campaign
? The government should embark on a massive
Public Relations and Information campaign. The
citizens should be made to understand what is a
budget, how the taxes are collected, how they are
used. They should begin to view tax evaders as
criminals. "He who does not pay his taxes - is
stealing from you and from your children", "Why
should YOU pay for HIM?" "If we all did not pay
taxes- there would be no roads, bridges, schools,
or hospitals" (using video to show disappearing
roads, bridges, suffering patients and students
without classes), "Our country is a partnership -
and the tax-evader is stealing from the till (kasa)"
and so on.
* The phrase "Gray Economy" should be replaced
by the more accurate phrases "Black Economy" or
"Criminal Economy".