Analytics, Financial Services, Latvia, Legislation, Shadow economy, Taxation

It is clear that people receive cash somewhere and deposit it in bank accounts to make, for example, mortgage payments, which are subtracted from their accounts. Banks, aware of many people being in need to make cash deposits, have reacted in a clever way, setting up cash pay-in ATMs. There were fewer cash pay-in ATMs before the 2008-2009 crisis, explains Krigers.

Krigers believes that shadow economy is permitted to exist to ensure as much cash as possible in circulation. Politicians use the shadow economy for Latvia's success story, since the short-term shadow economy is useful for the Cabinet, local governments and residents.

As a result, the government does not have to take care of those involved in the shadow economy, local governments are interested in their residents having stable incomes to be able to pay bills, buy food and not request benefits. Moreover, this cash also helps local businesses to develop. Residents in turn are content with receiving as much money as possible, explains Krigers.

He proposes a 2% tax whenever someone uses pay-in ATMs, pointing out that would considerably increase budget revenue.

As reported, the shadow economy reduced to 21.1% of gross domestic product in Latvia in 2012, according a study on the shadow economy in the Baltic States presented at the Stockholm School of Economics in Riga last week.

Johannes Kepler University of Linz Professor Friedrich Schneider estimates that the share of the shadow economy in Latvia is at 25.5% of gross domestic product (GDP) this year.