Even though the “shadow economy” may be over or understated in a specific instance, it simply shows that particular expenditures for a country can or cannot be justified in terms of actual purchasing power.

Tracking a nation’s real GDP can provide a true guide to the state of a economy, devoid of particular partisan or philosophic issues.

That is precisely why a national sales tax to replace the onerous and complicated income tax would provide a simpler and more measurable indicator of the ability of a country to afford (or not) its various political choices regarding consumption or spending.

.

“We have consciously refrained from including MIMIC estimates of the “shadow economy” as presented by Friedrich Schneider and several of his co-authors. Not only is the “shadow economy” poorly defined, but a careful econometric review (Breusch, 2005) demonstrates that “The literature applying this model to the underground economy abounds with alarming Procrustean tendencies.
Various sliding and scaling of the results are carried out in the name of ‘benchmarking’, although these operations are not always clearly documented. The data are typically transformed in ways that are not only undeclared but have the unfortunate effect of making the results of the study sensitive to the units in which the variables are measured. The complexity of the estimation procedure, together with its deficient documentation, leaves the reader unaware of how the results have been stretched or shortened
to fit the bed of prior belief.” He concludes that “the MIMIC model is unfit for the purpose” of estimating the size of the underground economy. Breusch (2006) also reviews a book edited by Bajada and Schneider (2005) and comments on a chapter written by the editors which purports to show the size of the shadow economy in 145 countries. Breusch concludes that “it is impossible to reconstruct these results from the documentation that is provided here or in other Schneider papers on which this chapter
is based. Neither the data nor the model details were forthcoming from Schneider when I asked for them”. The authors of this paper have had similar experiences in various attempts to obtain data and model specifications from Schneider in order to attempt to replicate his results. We therefore concur with Breusch’s (2005) assessment that “There are many other results in circulation for various countries, for which the data cannot be identified and which are given no more documentation than ‘own calculations by MIMIC method.’ Readers are advised to adjust their valuation of these estimates accordingly.”