Intersectoral Shadow Economic Linkages and their Impact on Tax Evasion

The article discusses shadow economic linkages between companies from different sectors. The research hypothesis is that the multiplier effect can cause a spillover of the shadow economy from one sector to another through business connections between companies. The research methodology comprises, first, a correlation analysis of the indicators reflecting the level of informal activities in the key industries of Russia in 2011–2017; second, analysis of input-output tables to reveal the patterns inherent to intersectoral financial flows that involve sectors with a large share of shadow activities; and, third, analysis of the tax ratio in the key sectors in the given period. The correlation analysis of Rosstat’s adjustment of gross value added for informal economic activities and the share of undocumented workers employed in the total number of workers in the sector has revealed a strong correlation between these indicators. It was found that such sectors as real estate, agriculture and forestry, construction, trade and hotel industry have shadow economies exceeding the average level in the country. We used the input-output balance data to reveal the close connections between the sectors with a large share of shadow activities and other sectors. Our calculations have brought to light an increase in the share of illicit transactions in some industries due to interactions with shadow sectors. This trend was particularly characteristic of such industries as transport and communications, education, health care and social services. It was also found that the tax ratio for transactions involving companies from sectors with a large share of shadow activities tended to decline due to tax evasion. These research results can be used by tax authorities to detect and monitor economic operations associated with high tax evasion risks. For citation Fedotov D.Yu., Nevzorova E.N. Intersectoral Shadow Economic Linkages and their Impact on Tax Evasion. Journal of Tax Reform . 2020;6(1):36–53. DOI: 10.15826/jtr.2020.6.1.074. Article info Received February 15, 2020 ; Revised March 12, 2020 ; Accepted April 9, 2020