Cost of Tax Evasion Estimated at Over $3 Trillion Annually

The Tax Justice Network late last month published a new report that deserves much wider notice than it has received so far. Authored by Richard Murphy, it uses recent estimates by the World Bank on the size of the underground or shadow economy covering 98% of world gross domestic product to calculate the amount of tax lost as a result. The totals are simply staggering.

The report finds that over $3.1 trillion annually is lost to tax evasion worldwide. The calculation is quite simple, though necessarily imprecise. It takes the average size of the underground economy as given in the World Bank paper (1999-2006 average) and multiplies it by each country's GDP (mostly 2010) to determine the size of the shadow economy. This figure was then multiplied by the country's average tax burden (tax/GDP; 2010 or most recent available) as reported by the Heritage Foundation's 2011 Index of Economic Freedom.

Here are the top 10 countries in terms of gross dollars lost to tax evasion. The U.S. is number 1, by virtue of having the largest economy by far, even though it has relatively low tax rates and the second-smallest underground economy by percentage of GDP.

Country             GDP ($t)          Shadow Economy/GDP        Tax/GDP              Evasion ($b)

US                     14.6                          8.6%                           26.9%                   337.3
Brazil                    2.1                       39.0%                           34.4%                   280.1
Italy                      2.1                       27.0%                           43.1%                   238.7
Russia                  1.5                       43.8%                            34.1%                   221.0
Germany              3.3                       16.0%                            40.6%                   215.0
France                 2.6                       15.0%                            44.6%                   171.2
Japan                   5.5                       11.0%                            28.3%                   171.1
China                   5.9                       12.7%                            18.0%                   134.4
UK                      2.2                       12.5%                            38.9%                   109.2
Spain                   1.4                       22.5%                            33.9%                   107.4

As an example of the scale of tax evasion, the study ranks countries by tax evasion relative to a country's health care expenditures. Bolivia was the worst off, with tax evasion equal to 419% of health care spending; Russia was second at 311%. Overall, 67 countries saw tax evasion exceed health care spending, and for 119 countries total, it was 50% or greater.

The consequences of tax evasion are enormous. When we consider the European debt crisis or funding stress on social programs worldwide, it is clear that these figures mean the difference between solvency and insolvency for many countries. As a result, countries need a policy response equal to the task.