Summary
It is the fact that the Malaysia’s total revenue and tax revenue as a percentage to GDP has been on a declining trend for the pass more than 10 years. Taxing the shadow economy is an alternative way to increase government tax revenue to the amount of RM50.8 billion in 2019.
In 2019, the size of the shadow economy in Malaysia is 28.2% of GDP. Empirical evidence clearly illustrates the inverse relationship between wages and the size of the shadow economy. The estimated wage elasticity, that is, the percentage changes in wages as a result in the percentage changes in the size of the shadow economy ranges from -0.23% to -0.39%. A 10% reduction in the size of the shadow economy will raise wages between 2.3% to 3.9%.
Digitalisation, cashless transactions and electronic payments system and formalising the shadow economy are good strategies to mitigate the shadow economy. Acknowledging the shadow economy’s existence and accommodating the sector as a permanent feature of the overall economy, and incorporating shadow economy in the National Development Plan can be a long-term strategy to combat the growth of the shadow economy.
