The scandals with concealment of income by large companies in tax havens, the unresolved problem of estimating the size of the shadow economy, and its high share in emerging markets (EM) make issues of the methodology for calculating the shadow income of enterprises relevant for today. The aim of the study is to substantiate the method for calculating the scope of shadowing of legal business income based on the method of shadow rates of costs on invested (equity) capital. The authors construct a two-factor linear regression, which enables to test the hypothesis of the effect of the expected rate of return and return on equity at the shadow economy level. The regression analysis confirms a negative correlation between ROE and the shadow economy level. There is a positive correlation between the risks of investing in equity, which are reflected in the expected rate of return on capital, and the total income shadowing. The regression-correlation analysis of the dependence of the shadow income of enterprises on these factors confirms a similar pattern. Comparison of the obtained values of the shadow income of enterprises in Ukraine with alternative estimates of the shadow economy reveals a higher sensitivity of the proposed method to changes in country risks, as well as to decisions aimed at improving business conditions. It is confirmed that the exacerbation of risks automatically reflects on the expectations regarding the return on investment and on the official declaration of income. Therefore, the shadow economy reduction is related directly to a set of measures aimed at minimizing the risks of business activities.
How to Cite
shadow income, cost of equity, shadow rate of cost of equity, risk premium, interest rates, return on equity
Gardner, M., Wamhoff, S., Martellotta, M., & Roque, L. (2019). Corporate Tax Avoidance Remains Rampant under New Tax Law. Institute on Taxation and Economic Policy (ITEP). Retrieved from: https://itep.org/wp-content/uploads/04119-Corporate-Tax-Avoidance-Remains-Rampant-Under-New-Tax-Law_ITEP.pdf
Oxfam Deutschland e.V. (2019). Retrieved from: https://www.oxfam.de/
Stiglitz, J. E., & Pieth, M. (2016). Overcoming the Shadow Economy. Series: International Policy Analysis. Published by Friedrich Elbert Stiftung.
Schneider, F. und Boockmann, B. (2018). Die Größe der Schattenwirtschaft – Methodik und Berechnungen für das Jahr 2018. Linz; Tübingen. Retrieved from: http://www.iaw.edu/index.php/‐288/member/222
Putnins, T., & Sauka, A. (2015). Measuring the shadow economy using company managers. Journal of Comparative Economics, vol. 43, issue 2, pp. 471–490.
Medina, L., & Schneider, F. (2018). Shadow Economies Around the World: What Did We Learn Over the Last 20 Years? IMF Working Paper, WP/18/17. Retrieved from: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3124402
Breusch, T. (2005). Estimating the underground economy using MIMIC models. Working Paper 2005, Canberra, Australia. Retrieved from: http://econwpa.wustl.edu/eps/em/papers/0507/0507003.pdf
Copeland, T., Koller, T. and Murrin, J. (2000). Valuation–Measuring and Managing the Values of Companies. John Wiley Sons, New York.
Tereshenko, О., Voloshanyk, N., & Savchuk, D. (2019). Rate of Cost on Investment Capital in Emerging Markets. Sosiety, Integration, Education. Proceedings of the International Scientific Conference. Rezekne. Volume 6, pp. 665–674.
Shadow economy in Ukraine. Results of researh of 2019 in the framework of the project SHADOW H2020. Retrieved from: http://kiis.com.ua/materials/pr/20191107_Shadow/Shadow_UA.pdf
Combined method of E&Y, Mastercard. Research of shadow economy in Ukraine. Retrieved from: https://bank.gov.ua/news
Tereshchenko, O., & Voloshanyuk, N. (2017). Capital implicit expenses in the shadow economic revenue. PNAP, no 6, pp. 85–94.
Zbruch (2015). The level of the shadow economy has grown to 47%. Retrieved from: https://zbruc.eu/node/40301?theme=zbruc&page=211
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.