Government failure – the main cause of illicit work

Increasing shadow economic activities in OECD countries, as illustrated in Chapter 4, can be explained by incorrect and market-distorting state intervention that does not conform to market principles. The consequences for taxation, transfer payments, and the reduction of working hours were derived theoretically in Chapter 6. They are the main causes for illicit work. Many of these state interventions have the re-allocation of income or work as their objective. Correcting market distribution is necessary and an important pillar of the social market economy. Yet, the current situation, in Germany, shows that these interventions overshoot their goals. The proposed reforms of the taxation, social security, and health care systems were triggered by the unsatisfactory economic situation with high unemployment and low (official) economic growth. To counter these, politicians demand further re-allocation, simultaneously criticising the (pure) market economy. Particularly after the fall of socialist regimes, a comparison of the two market systems is no longer possible. Thus, state interventions are often carried through with the argument of social injustice and (alleged) market failure. The demands of interest groups for social equalisation, increased fairness of distribution, and governmental interventions cannot be ignored. Yet, how much the state is actually able and willing to contribute to fairer distribution is in question.