Tax evasion impacts country credit ratings and lending costs says new study

http://www.eurekalert.org/pub_releases/2016-01/uoea-tei011816.php

Public Release: 19-Jan-2016
Tax evasion impacts country credit ratings and lending costs says new study
University of East Anglia

High levels of tax evasion are linked to higher interest rates and can be a predictor of a country's credit risk, according to a new study led by the University of East Anglia (UEA).

Researchers investigated the controversial role of the 'informal' or 'shadow' sector -- activities that are not officially registered but do make an economic contribution -- in the economies of 64 countries in the run-up to the current Eurozone crisis.

For the first time they focused on the impact the informal sector, which is directly linked to tax evasion, has on sovereign debt markets. They found that it has significant adverse effects on country credit ratings and lending costs. These results do not change with respect to the stage of economic development of a country.

Countries such as Switzerland, the United States, Luxemburg, Austria and Japan that had the smallest levels of informal economic activity -- averaging between 8% and 11% of Gross Domestic Product (GDP) -- faced low lending costs, under about 4%. In countries such as Panama, Peru, Uruguay, Honduras and Sri Lanka, where around half of the economy was untaxed, country lending costs were much higher and ranged between 7% and 10%. In comparison, the United Kingdom's informal sector averaged at 12.4% of GDP, while its interest rate was 4.5%.

There was a wide variation in the level of the informal economy, even within developed countries. Those with the largest informal sector among member countries of the Organisation for Economic Co-operation and Development (OECD) studied were Greece (26.86%), Italy (26.96%), Portugal (23.12%) and Spain (22.38%), all of which had around a quarter of economic activity untaxed and faced severe problems during the recent Eurozone debt crisis.

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