Underground Economy

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This year around the April 15th deadline, tax-paying Americans should have realized that they were paying more in taxes than they should have. More and more people are evading the International Revenue Service, employers and workers alike. Americans are reverting to the underground economy, where tax-evaders, illegal workers, prostitution, and drug rings are abundant. This type of hidden income made by these activities go unreported in the national income, and has become accepted as the status-quo all over the world. The Underground economy is difficult to control, but can be managed with well thought out tax plans, and more severe punishment.

In the years leading up to 1965, the marginal tax rate was 17 percent. In just 15 years, the rate rose to 24 percent in 1980. Consistent tax hikes create a resentment for the system. To avoid these tax increases, many Americans chose to slide into the underground economy, where the tax rate is non-existent. There are many ways to become a part of the underground economy: the most common of all is underreporting taxes.

During the 1960’s and 1970’s, the United States Government wiped out millions of jobs. Hans F. Sennholz states, “ It forcibly raised the cost of labor through sizeable boosts in Social Security Levies, unemployment taxes, workman’s compensation expenses, occupational safety and health act expenses, and many other production costs” (Sennholz, 10). These two extremes, rising unemployment and falling incomes, led to many people reverting to “off the books” employment.

Economists disagree as to what is classified as the underground economy. Some

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say that it is compromised of everything not reported to the IRS, along with all other possible criminal activities that yield an income. Others have a different view of what compromises the underground economy. These economists say that it consists of only law-abiding citizens who seek shelter in the underground economy because the government is being too forceful with tax collections. These are employers and workers who produce valuable services without reporting them to the proper authorities. Then, there is the other side of the underground called the underworld, which is comprised of criminals extorting money, committing fraud, bribery, running prostitution and drug rings, and much more.

Focusing on the underground economy, as opposed to the underworld, there are four main categories that underground activities can be classified into. The first is production that produces income which in turn is not reported. This happens in everyday jobs like cable-men and plumbers who do some work “off the books”, collecting cash and not reporting it to the IRS. The second category is employers and workers that violate set laws such as labor laws, export and import controls, and many more. These people may pay taxes, but their work is all done illegally. Since it is not legal, they must hide from the Government. The third consists of welfare cheats and people who draw social security benefits. Welfare cheats don’t work and get paid because they are “disabled”, which obviously is not always true. People drawing social security are mostly the elderly who cannot work. Finally, the fourth category is economic production done by illegal aliens. These people must remain hidden from the government so as they won’t get deported. However, some illegal aliens pay income taxes, which can easily point them out to the

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authorities.

All of these categories show the understanding of what consists of the underground economy, but fails to do one thing: count it. This has proven to be very hard, and in doing so has wasted many man hours of the IRS’s and other authorities time. Attempting to calculate the underground economy is difficult, but there are many estimates. A recent news report by Bruce Bartlett from townhall.com states, “[…] The United States underground economy is between 6.7 percent and 13.9 percent depending on the method used for calculation”(1). This number is a substantial amount of Gross Domestic Product (GDP) for the United States economy. The GDP is what our economy makes as a whole and having that large of a percentage taken out is astonishing. One method used for calculation is to count all of the currency being circulated around the United States and compare it to the reported income. Being secretive in order not to be detected by the authorities, almost all transactions are made in cash in the underground economy. Bartlett goes on to say, “[…] In 1990 there was $1,105 of currency in circulation for every family of four in America. By March of this year, that figure has risen to $2,455, and increase