Economic Shadows and Light

ANKARA – If it is true that we live in a "global village," bound to one another through commercial, financial, and social ties, then it is also true that informal economic activity in one part of the world has a negative impact elsewhere. That means that formalizing every economy should be viewed as a global public good. The G-20 and other international entities should take the lead in ensuring the coordination and cooperation needed to provide it.

The biggest losers of the informal economy are ordinary citizens, because informality inhibits long-term economic growth and productivity gains; creates unfair competition; hinders the growth of small and medium-size enterprises (the main sources of employment); and leaves millions of workers without basic rights, such as health insurance and pensions. It also leads to significant tax-revenue losses, reducing both the quality and quantity of public services. Income inequality and social injustice invariably increase as well.

Reducing the scope of the formal economy may seem to be a national task; and governments should indeed act. They should reduce the tax burden, simplify tax systems, and reduce regulatory compliance costs, while strengthening enforcement. Likewise, they should eliminate barriers to competition, simplify business registration processes, increase the transparency of public procurement, and improve access to credit.
But combating the informal economy requires international cooperation as well. According to the European Commission, "non-cooperative" and "non-transparent" jurisdictions – also known as tax havens – cost the European Union's member states more than $1 trillion in revenue every year. Controlling and decreasing the risks that these jurisdictions pose can happen only at the global level.

Here the OECD and G-20 can play an important role. The OECD already provides vital support in promoting international cooperation on taxation. Article 26 of the OECD Model Tax Convention on Income and on Capital regulates the content and practice of bilateral exchanges of tax information, which are crucial to fighting tax avoidance and evasion and combating harmful tax competition.

Similarly, the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes is leading an extensive peer-review process of legal frameworks and implementation of standards. The OECD recently issued an Action Plan on Base Erosion and Profit Shifting (BEPS) that identifies specific measures to combat double non-taxation and to establish comprehensive and transparent standards of fair taxation.

The focus of G-20 summits on global tax evasion in recent years is also encouraging. When the G-20 leaders convened in Los Cabos, Mexico, in June 2012, they reiterated their commitment to strengthen transparency and comprehensive exchange of tax information. They also reiterated the need to prevent BEPS.