It has been found that the underground economy of Korea reached 290 trillion won in size last year, no less than 23% of the national nominal GDP.
On March 3, the Hyundai Research Institute published a report titled “How to Deal with Underground Economy,” pointing out that Korea’s ratio of owner operators is higher than the average of OECD member countries and the tax burden is increasing rapidly to result in the fast expansion of the underground economy.
The research institute used a money demand model to estimate the size of the underground economy. The percentage was approximately 10 percentage points higher than the average of advanced economies and about three percentage points lower than that of emerging nations. Although the absolute size increased consistently, its ratio to the GDP rose a little bit after some decrease.
According to the report, one of the reasons for the high percentage is because of the ratio of self-employed workers as high as 28.8%. It was 7.0% in the United States, 12.3% in Japan and 13.9% in Britain last year. The National Tax Service has recently conducted tax investigations on the high-income self-employed and found that their income tax evasion rate amounts to 48%.
Another reason was because the people’s burden regarding taxes and social security contributions was increasing more rapidly than in the US, Japan and Britain. The burden rate rose from 22.6% to 25.9% in Korea between 2000 and 2011. The other causes included widespread corruption in industries and society and workers being driven into the black labor market due to the ongoing economic recession.
The institute said that different industry-specific measures are required for legalization of the underground economy, including tax incentives for the benefit of those who pay their taxes faithfully in the food service, education, medical sectors, etc. “A closer supervision has to be put in place in the service industry, where cash transactions are more frequent, and the tax authorities has to be able to get more access to financial information,” said Kim Min-jung, researcher at the institute, adding, “At the same time, the government has to pursue economic revitalization to prevent the black labor market from further increasing its size.”