Canada’s Underground Economy

Statistics Canada quietly dropped its annual update of the underground economy in Canada today. I say quietly because even hours after it was released on its Daily, news of it has yet to hit the media in any way. This is a topic that is near and dear to my heart as I cut my teeth as an academic on this topic. My MA thesis was on the Canadian Underground Economy and I co-authored THE book, with the esteemed @DEAGiles, on it as well: Taxes and the Canadian Underground Economy.

The Statistics Canada report estimates the upper bound for the underground economy in 2011 to be $40.9 billion which is equivalent to 2.3% of GDP. According to Statistics Canada, the underground economy in Canada is the smallest in the world and has not changed at all since 2001. Both of these claims are, in a word, laughable.

My own work, which updated the model in my book linked to above, pegged the underground economy to be 15.3% of GDP in 2001. In that year, Statistics Canada estimated the underground economy to be 2.6%. This is quite a gap. I am not the only one estimating the size of the underground economy in this range. Friedrich Schnider, probably the worlds most prolific author of the underground economy, estimates the underground economy in Canada to have been 15.3% in 2003, similar to my own estimate. He further suggests that the underground economy in Canada has shrunk, not staying the same as claimed by Statistics Canada, since then to 11.9% of GDP in 2011. The World Bank estimates that Canada’s underground economy was 15.9% of GDP in 2001, very similar to my own estimate, shrinking to 15.3% by 2007.

We can also compare Statistics Canada’s estimate to those that exist for the comparable countries. Edgar Feige, one of the grandfather’s of academic study of the underground economy, recently pegged the underground economy in the US to be $2 trillion which is equivalent to 15% of GDP. Research for Australia suggests that the underground economy could be as much as 30% of GDP.

Statistics Canada provides no discussion on why their estimate is so much lower than those produced by a multitude of independent academics the world over and they never have and that its estimates of the change of the underground economy does not reflect those produced by others. Given all the policy changes in Canada along with increased enforcement by CRA, Statistics Canada is suggesting that the Canadian Underground Economy does not respond to any of the normal policy changes suggested by academic research.

Let’s consider just one input factor into Statistics Canada’s estimate: undeclared tips. Statistic Canada estimates undeclared tips to amount to as much as $1.7 billion yet CRA estimates peg undeclared tips to be as much as $6 billion. I trust CRAs evidence far more than Statistics Canada on this front.

It is time for Statistics Canada to respond to criticisms of its estimate of the Canadian underground economy. It needs to address why its estimates do not accord with existing evidence, including evidence from CRA as well as from academics around the world. They also need to address their claim that the underground economy in Canada is static to policy changes that have been introduced by our government specifically to curtail the underground economy. Academic evidence shows we have had success in shrinking our underground economy and this disconnect in Statistics Canada’s work is shocking.

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10 thoughts on “Canada’s Underground Economy

  1. Seems an odd post to me. You don’t say what you dislike about the STC methodology. You just condemn it. That’s not the way to make progress in this area.

  2. […] Lindsay Tedds finds the StatsCan numbers on the size of the underground economy in Canada to be laughably small, and that it’s probably more like 15 percent of GDP, not 2.3 […]

  3. […] Dr. Lindsey Tedds, professor of economics at the University of Victoria, discusses how Statistics Canada’s estimate of the underground economy fails to pass the smell test: […]

  4. I cannot for the life of me believe that this vast country with all of its resourses can possibly be in the red anywhere !!!!!!!

  5. […] 10% of the size of the U.S., this would put our tax gap at approximately $45 billion (more than StatsCan’s ‘estimate’ of the whole Canadian underground economy!). The U.S. tax gap is comprised of $28 billion lost to […]

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