Estimating Ireland’s Black Economy

In a nice little paper from 1997 published in the now defunct Irish Banking Review, Gabriel Fagan produced the following estimates of Ireland’s Black Economy from 1963 to 1995.

Fagan’s 1997 paper is available here.  Fagan also wrote a more detailed paper that was published in The Journal of the Statistical and Social Inquiry Society of Ireland.  This paper published in 1994 is available here.

The estimates provided above are based on the monetary approach to estimating the black economy.  The assumption is that there are ‘excess currency holdings’ in the economy over and above what is necessary for the volume of transactions reported in the National Accounts.  The next step is that this extra currency in circulation is used in the black or cash economy so as to avoid detection.

Fagan (1997) estimated the following equation

where C is the amount of currency in circulation, M1 is the narrow money supply (currency plus deposits), Y is Gross National Product, R is a long government bond interest rate and T is a measure of the tax burden (total tax revenue as a proportion of GNP).  Fagan (1997) also included a time trend and reported the following results

Fagan used the increase in currency holdings as a results of increases in the tax burden to produce the estimates of the black economy up to 1995 provided above.

Updated data on the same variables used by Fagan is provided here.  This dataset has observations from 1960 to 2007.  Using this new dataset a version of Fagan’s original equation is estimated.

The full results are available here which suggest that all may not be well with the model specification.  We will ignore these and use this simple model to find an estimate of the black economy.

We can do this by using the following steps.

1. Find the change in proportion of the money supply held as currency in the economy that are the results of changes in taxation.
2. Estimate the volume of these excess currency holdings.
3. Find the volume of currency needed for the transactions reported in the national accounts.
4. Calculate the velocity of circulation in the formal economy.
5. Use 2 and 4 to find the level of income in the black economy.
6. Find the percent of GNP that this estimate comprises.

An updated spreadsheet with all of these calculations is available here.  Here is a graph of the estimates from Fagan (1997) and those calculated here.

Although there are difference from 1960 up to 1980, the two series track each other through most of the 1980s and for the years in the 1990s for which Fagan estimates are available.  This is highlighted in this graph.

From the new estimates we see a downward trend in the size of the black economy during the Celtic Tiger period.  This continued up to 2003, for which there is a black economy estimate of just 5.6% of GNP.  A rise since then gives a most recent estimate for 2007 of just over 8.5% of GNP.

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Tax Defaulters 2

After collating the data published on tax defaulters available from the Revenue Commissioners it has been possible to track some additional trends to those reported in The Irish Examiner and looked at here.

First up we can examiner the number of cases reported each quarter from 2001: Q4 to 2009: Q3

 

As can be seen the numbers were below 100 for the first five quarters in the same and then shot up as the investigation in the bogus non-resident accounts (DIRT evasion) reached a conclusion.  Since then the number has shown a gradual downward trend and figures are now back to 2001 levels.

Although the number of published defaulters may be trending downward the average settlement has been rising.

 

The average settlement started out below €100,000.  The average settlement in 2009 Q3 was just below €250,000.

The total settlement is made up of two elements:

1. The amount of tax outstanding
2. The level of interest and penalties imposed

A clear pattern from the data is that the total settlement is determined as much by the interest and penalties as it is by the amount of the tax.  Over the 32 quarters in the sample, the Revenue established that there was €355.5 million in evaded tax due.  The total settlements made by the 4,959 defaulters total €867.6 million.  The difference of €541.1 million is due to interest and penalties.

The interest and penalties imposed are 160% of the total amount of tax due.  There were some cases where the interest and penalties were some 700% greater than the original amount of tax due.  In one case, €75,000 in tax was due but the total settlement was nearly €600,000 as a result of the interest and penalties imposed. 

Here we see the increase in the total settlements made above the amount of the tax as a result of the interest and penalties. Ouch!

The largest penalty imposed was of €9.7 million on Bovale Developments who had an underpaid tax bill of €12.5 million from a total settlement of €22.2 million.

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Tax Defaulters

On January 1 The Irish Examiner  ran a report on tax defaulters in Ireland.  They carried a number of short articles on the issue.  See here, here and here. 

Accompanying the article were a number of tables which are not available online.  Scans of these tables are available below.  Click title to see table.

• Number of Defaulters per 10,000 Population by County
• Top 10 Occupations by County
• Top 30 Defaulter Towns
• Top 10 Defaulters
• Top 5 Defaulters in the Top 8 Occupations

The data used by The Irish Examiner covers the period Q4 2001 to Q3 2009.  The data is available from The Revenue Commissioners here.  The cases reported come from Part 2 of the Defaulters list.  It is interesting to note that the proportions of the total settlements that are made up of “tax due”  and “interest and penalties”.

The 4,961 cases in the analysis meet the following criteria.

Settlements are not published where the amount is less than the threshold (€12,700 (pre 2005) or €30,000), where the amount of fine or other penalty does not exceed 15% of the amount of tax or where the taxpayer has, in advance of any Revenue investigation, voluntarily furnished complete information relating to undisclosed tax liabilities.

These cases only make a small proportion of the overall tax evasion cases processed by the Revenue Commissioners.

Using the numbers in the third of the articles linked to above it is possible to create the following table.

Occupation	Number of Cases	Average Settlement
Legal	32	€460,847
Medical	not given	€297,134
Company Directors	733	€270,087
Builders	616	€230,244
Farmers	904	€111,803

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