Underground economy

An underground economy (지하경제/地下經濟) or black market (암시장/暗市場) is the market in which illegal goods are traded. In other words, the underground economy refers to business and economic activities, legal or illegal, that are not covered by official economic statistics and thus easily evade taxation, according to Austrian economist Friedrich Schneider.

Due to the nature of the goods traded, the market itself is forced to operate outside the formal economy supported by the established state power.

Key words
underground economy, shadow economy, black market, grey market, taxation, self-employed

Size of Underground Economy
The size of the nation’s underground economy is not known, but experts agree that Korea has a bigger underground economy than other OECD countries due to the high number of self-employed people. As a matter of fact, the share of self-employed businesses to the nation's economy amounts to 31.1 percent compared with the average 15.8 percent of other OECD member states. The National Tax Service (NTS, 국세청) estimates 40.9 percent of high income bracket would prefer tax evasion.

The private Hyundai Economic Research Institute (HRI) said that self-employed businesses made up one-third of the country’s total economic activity.

The research institute estimated the size of the nation’s underground economy in 2012 at about 290 trillion won. The ruling Saenuri Party said the nation’s shadow economy was estimated to account for about 24 percent of the nation’s annual gross domestic product, which would mean untaxed economic activities in the shadow economy reached 370 trillion won. Park’s administration hopes to raise 1.6 trillion won annually by taxing 6 percent of the shadow economy.

To achieve the best results, the NTS is pushing for the revision of the Act on Financial Intelligence Unit (KoFIU, 금융정보분석원) to gain greater access to data on large-scale cash transactions. Currently, financial data under the control of the Financial Services Commission only can be shared with the NTS for investigating suspected or exposed irregularities.

Components
Underground economic activities include:
 * Fake oil trading
 * Usury financial transactions
 * Real estate speculation
 * Illegal trading of ownership of apartment lot (아파트분양권)
 * Narcotics and other illegal drugs
 * Prostitution
 * Trafficking
 * Organized crime involved in illegal gambling
 * Biological organs
 * Weapons
 * Forced labor
 * Illegal foreign exchage transactions
 * Legal trading of bearer bonds (무기명채권/無記名債券) and capital gains (자본이득/資本利得)
 * Ownership of government-regulated businesses, etc.

Pricing
Goods and services traded in the black market take one of two price levels:
 * They may be cheaper than legal market prices. The supplier does not have to pay for production costs or taxes. Criminals steal goods and sell them below the legal market price, but there is no receipt, guarantee, and so forth.
 * They may be more expensive than legal market prices. The product is difficult to acquire or produce, dangerous to handle or not easily available legally, if at all. If goods are illegal, such as some drugs, their prices can be vastly inflated over the costs of production.

Black markets can form part of border trade near the borders of neighboring jurisdictions with little or no border control if there are substantially different tax rates, or where goods are legal on one side of the border but not on the other. Products that are commonly smuggled like this include alcohol and tobacco. However, not all border trade is illegal.

Taxation
In March 2013, President Park made it clear again that her administration would not seek tax hikes to fund welfare. Instead, she said it would secure funds by cutting wasteful spending and collecting revenue by regularizing the shadow economy.

Thus, additional tax revenue from the underground economy is critical for the success of the new government, which has promised to boost welfare spending without increasing taxes. To fund President Park’s welfare-related pledges, critics estimate that about 153 trillion won will be needed over the next five years. The underground economy usually leads to evasion of taxes. Since the Kim Young-sam government introduced the Real Name Financial Transactions system in 1992, the government has exerted every effort to normalize the underground by encouraging use of credit cards and cash receipts. However, the NTS estimates the real properties are traded arount 4,000 trillion won a year while total settlements in financial markets amount to 63,200 trillion won a year.