South Korea's Underground Economy Larger Than OECD Countries

The South Korea's underground economy size is greater than other advanced countries in the world.

According to a research paper, the underground economy in South Korea is equivalent to 10 percent of the gross domestic product of the country. The tax evasion is about 3.7 percent which shows its large gap from other OECD countries.

Organization for Economic Cooperation and Development (OECD) is an international organization founded in 1961. It aims to help the government of different countries to talk about the globalization of the economy and to improve their social and economic governance.

According to Kim Jong-hee, a professor at Chonbuk National University, He said that the South Korea's shadow economy scale is about 10.89 percent which exceeds the average percentage of G7 countries that falls only to 6.65 percent and the 8.06 percent from 18 member states.

Kim made these conclusions based on a study about the 26 members of the OECD from the year 1995 up to 2014.

Moreover, compared to 2.21 percent of G7 and 3.06 percent of other countries, the amount of tax evasions which is about 3.72 percent is relatively higher.

The use of multiple indicators multiple causes (MIMIC) model help measure the underground economy. The indicators are employment rate, money circulation, taxation, number of self-employed, and gross domestic product in the country.

In 2014, the GDP of South Korea was 1,486 trillion won (US$1.32 trillion). Based on Professor Kim's analysis, the black market in the country reached 161 trillion won during that year which consists of 55 trillion won from tax evasion.

"Underground economic activities induce tax dodging, leading to fiscal deficits and tax hikes for key economic actors to make up for the uncollected taxes. It also raises the social cost because the government has to take action against such activities," Kim said on the research paper.

The research paper also tackled the tax progressivity in South Korea saying that the tax evasion's high rate is undercutting the progressive taxation purpose of reducing the amount of taxes.

"Taxes serve to ease the income imbalance through progressivity. But the tax dodging can greatly influence redistribution and negatively affect economic growth," the research paper said.