The EU, in common with other major economies of the world, loses a significant amount of potential tax revenue every year to tax evasion and tax avoidance. Some EU-wide estimates are as high as 500 billion – 1,000 billion Euros annually.
This tax loss takes two major forms 1) domestic and international. Domestic tax losses come about when the taxable funds are not shipped overseas but stay within the country. This form of tax loss is on the decline as the increasingly electronic nature of financial transactions and an economy that is less and less cash oriented make domestic avoidance harder.
At the same time, tax flight, the loss of tax revenues related to cross border flows of funds, has been rising rapidly.
The world economy is at a critical point where 1) continuing economic uncertainty, 2) sustained economic imbalances, 3) re-emerging fragility in the financial sector and 4) an emerging divergence amongst major economies in the world on approaches to financial regulation all pose serious risks to achieving sustainable growth.
While on the one hand, some emerging economies face the danger of overheating and are having to confront massive capital inflows and raise interest rates much of the ‘old’ developed world remains under the shadow of anaemic growth, decimated public finances and high unemployment. Many low income countries are somewhere in between but remain prone to many risks. The world economy is unlikely to recover on a sustainable basis with just one engine of growth.