Posted on 07/13/2004 9:34:54 AM PDT by Remember_Salamis
The underground economy Bruce Bartlett (archive)
July 13, 2004
Last week, the Organization for Economic Cooperation and Development in Paris issued a new report on the underground economy. This is only the latest study showing that a large fraction of employment and production in major countries as well as developing nations is taking place off the books, unrecorded in national accounts and untaxed by governments.
According to the report, the underground economy varies from 1.5 percent of gross domestic product in the United Kingdom to almost half in the Kyrgyz Republic. The OECD does not present data for the United States, but there is much data showing that it is a growing problem here, as well.
A recent book, "The Shadow Economy: An International Survey" (Cambridge University Press) by economists Friedrich Schneider and Dominik Enste, estimated the U.S. underground economy at between 6.7 percent of GDP and 13.9 percent in 1990, depending on the method used for calculation.
One common method is to look at currency in circulation as an indication of underground economic activity. By its nature, such activity is done almost entirely in cash so as to avoid detection by the authorities through checks or credit cards. On this basis, underground economic activity in the United States has probably risen sharply since 1990.
According to the Treasury Department, in 1990 there was $1,105 of currency in circulation for every American. By March of this year, that figure had risen to $2,455, an increase of 122 percent. It is highly unlikely that all of this increase is due to the needs of consumers to buy more goods and services, because per capita personal consumption expenditures only rose by 79 percent over the same period. This suggests that at least 35 percent of the increased demand for cash was for underground economic activity.
A further indication that this is the case is shown by looking at the composition of currency in circulation. Since 1990, 84 percent of the increase in currency is accounted for by $100 bills. Such bills now represent 71 percent of the monetary value of all U.S. currency, up from 52 percent in 1990. Average people do not ordinarily use $100 bills, but they are used heavily in the underground economy, which includes drug dealing and other illegal activity. Hence, it is reasonable to assume that the increased demand for $100s is due almost entirely to an increase in the underground economy.
Of course, even if this is true, it doesn't necessarily mean that the underground economy is growing here. U.S. currency is the medium of exchange of choice for underground activity worldwide. Indeed, 45 percent of U.S. currency circulates outside the United States for this reason. According to the Commerce Department, the United States "exported" $16.6 billion in currency last year, almost all of it in the form of $100 bills.
The former chief economist for the International Monetary Fund notes that the European currency, the euro, is now competing for the underground economy's business by having 500 euro notes, worth more than five times the U.S. $100, the largest bill printed by the Treasury in more than 50 years. He notes that $1 million in $100s would fit in a briefcase, but $1 million worth of 500 euro notes would fit in a purse -- a big advantage in the underground world.
The underground economy results from many factors, including criminal activity. But the bulk of it arises from ordinary businessmen and workers who are evading taxes and government regulations. The OECD downplays the importance of taxes and puts most of the responsibility on regulation. However, other studies have found that high tax rates are the most important factor in stimulating growth of the underground economy.
"In various surveys, the tax burden has always been identified as the main cause for the growth of the shadow economy," according to Schneider and Enste. Their analysis found that a 10 percentage point increase in the tax burden would cause the underground economy to rise by 3 percent of GDP. A Federal Reserve study found an even higher response, with an increase in the tax rate from 9.3 percent to 10 percent leading to a 1.5 percent rise in underground output.
A recent IMF study found that the composition of taxation was very important. High taxes on small businesses and the self-employed were most likely to lead to underground economic activity. "Raising tax rates too high drives firms into the underground economy," the study concluded.
One indication that taxes are stimulating tax evasion here is that the amount of income reported on tax returns has fallen compared to the amount of income paid as calculated by the Commerce Department. This income gap tends to rise and fall with the tax burden.
Whether caused by taxes or regulations, it is clear that government is the prime cause of the underground economy.
Bruce Bartlett is a senior fellow at the National Center for Policy Analysis, a Townhall.com member group.
I guess maybe we do have to account for evasion/avoidance.
The Office of the Texas Comptroller of Public Accounts:
| GG 29 Increase Tax Compliance and State Revenue Through Additional Audit Coverage Summary Due to limited staffing, the Comptroller's auditors focus on the largest sales tax accounts. An investment in 50 additional tax auditors would allow the agency to increase its audit coverage to additional large sales tax accounts, which would increase tax compliance and raise additional revenue to the state. Background Texas' taxpayer population continues to rise without any matching increase in the Comptroller's audit staff. In practice, this has meant that most of state's resources are dedicated to covering the largest taxpayer accounts. Taxpayers that account for the top 65 percent of the state's sales tax collections--Priority I accounts--are audited by the state every four years. Because the agency's audit resources are dedicated primarily to these accounts, most of the remaining (Priority II) accounts face less than a 1 percent chance of a compliance tax audit. At present, a taxpayer reporting about $8.8 million per year in sales tax collections would be classified as a Priority II account. The 2001 Legislature's S.B. 1458 authorized the Comptroller's office to contract with outside personnel to perform audits. These contract accountants, however, have limited training in state tax issues and are capable of auditing only specific industries with simple or limited tax issues and exposure. They are not equipped to deal with the many complex issues and exemptions provided for in the Texas tax statutes. The Comptroller's office has repeatedly observed a direct correlation between audit coverage and tax compliance. Over the last two-and-a-half fiscal years, the agency has employed an average of 444 auditors, compared with 515 in 1992. On average, each auditor performing Priority II audits has generated more than $500,000 annually in additional collections. The average annual cost for each auditor is approximately $70,000.[1] An investment of $3.5 million annually would allow the Comptroller's office to hire 50 additional auditors to concentrate on Priority II sales tax accounts.[2] The additional audit coverage could easily generate an average $300,000 yearly per auditor, producing a total net return averaging $11.5 million per year. Recommendation Fiscal Impact Currently, each auditor performing Priority II sales tax audits generates an average of about $500,000 in annual revenue collections, at an annual cost of about $70,000, including benefits. As the number of auditors increases, the amount of collections each auditor can generate decreases. Assuming each new auditor could generate at least 60 percent of the average revenue produced by current auditors, 50 additional auditors would generate about $15 million annually. The cost of the 50 auditors would total about $3.5 million annually, resulting in a net revenue gain to the General Revenue Fund of $11.5 million each year.
Endnotes [1] Based on current Comptroller's three-year average overall cost per auditor. [2] Based on the same cost level of $70,000 per auditor. |
"most of the remaining (Priority II) accounts face less than a 1 percent chance of a compliance tax audit."And that's for accounts that they keep all the money.
That avoidance level is not exactly unhealthy. Like Juries and the vote -- tax compliance rates serve as a strong check on government excess.
In spite of this large expansion, the compensation for collecting the Fair Tax that would be provided to states under H.R. 2525 would likely cover our projected costs. As a first approximation, we estimate that the cost to the Texas Comptroller's office for collecting the Fair Tax at full implementation would be $100 to $150 million per year. I emphasize, however, that there would be significant costs to begin collection, including the cost of facilities to house the additional processing facilities, the capital costs of information technology and revenue processing equipment, and the costs of notifying, registering and educating taxpayers on the new tax.
So where would the money come from "to begin collection", new buildings, parking lots, roads to the "new facilities", new computers,furniture, wages, etc. TIMES 50 states BEFORE one dime of sales tax is collected?
AG decided to show only one sentence of the paragraph.
Overlooked reply #36 didn't you lewislynn.
In any case those opening costs are merely a list of part of the projected costs that Texas sees as covered.
The Office of the Texas Comptroller of Public Accounts:
"The 2004-05 General Appropriations Act should include additional funding to allow the Comptroller's office to hire an additional 50 auditors and raise the agency's full-time equivalent employee (FTE) cap accordingly. "
lets see,
"Under the Fair Tax, we would serve approximately 900,000 more filers than we do currently. We estimate that serving that many additional taxpayers would require 1,100 to 1,600 more full-time employees. The Texas Comptroller currently employs about 2,700 people on a full-time basis."
Allows administration in parallel with their own tax enforcement efforts as well.
Would Texas audit every 4 years the Level I accounts in that 60% that don't have state sales taxes? Why would they? They could save money by not doing the expensive audits. They are only going to get a quarter of a cent for every dollar they collect.
To become a NRST compliant state, they will be extending there own tax base to cover services as well, as part of the converson to the NRST. That means that they will be in a position to collect state dollars from services.
Do you think my fine state of Texas is dumb enough to spend $70,000 to make $5,000? No way.
Of course not, over 80% of the dollar volume passes through 20% of the businesses. All a state needs to do is keep close tabs on the largest to assure meeting revenue, and rely on general enforcement effort for the rest.
Those accounts in the 60% would never be audited.
Becoming a NRST compliant state means the state collects taxes for themselves from service industry. The state of Texas is hardly going to overlook that factor, unlike you.
I think I'm going to adjust my evasion/avoidance estimate to over 10%.
The income/payoll tax system evasion/avoidence is abit more than that according to the combination of known and measurable non-reporting of income, from NIPA measurements plus the $1 Trillion plus size of the illegal and underground cash economies.
Adjust your figure where ever you wish.
Avoidence, my friend, is a good thing.
"Imposts, excises, and, in general, all duties upon articles of consumption, may be compared to a fluid, which will, in time, find its level with the means of paying them. The amount to be contributed by each citizen will in a degree be at his own option, and can be regulated by an attention to his resources. The rich may be extravagant, the poor can be frugal; and private oppression may always be avoided by a judicious selection of objects proper for such impositions. "
"It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess.
They prescribe their own limit, which cannot be exceeded without defeating the end proposed - that is, an extension of the revenue."
When applied to this object, the saying is as just as it is witty that, "in political arithmetic, two and two do not always make four."
If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds.
This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.
I think I'm going to adjust my evasion/avoidance estimate to over 10%.
Ahh, good, that means you will be investing and saving more too! But why stop at only 10%?
The beauty of the FairTax is that you can control how much you pay in taxes. If you happen to save, invest or spend a portion on used [previously taxed] items, you can get easily get your effective tax rate below 9%, quite lawfully I might add.
- "The income tax in effect makes us vassals to the government – the politicians decide how much income we can keep. No mere “reform” of this slave tax, such as flattening the rate, can correct its fundamental denial of control over our own money. Only the abolition of the income tax itself will restore the basic American principle that our income is both our own money and our own private business - not the government's."
- "Replacing the income tax with a national sales tax would rejuvenate independence and responsibility in our citizens. True economic liberty and moral revival go hand in hand."
- "A national sales tax would also put the American citizen back in control of national fiscal policy. The best way to curtail government spending is to cut taxes, because they can’t spend what they don’t get. But with a sales tax, we could deny funds to a spendthrift government – and give ourselves a tax cut – whenever we make the private choice to alter our spending and saving habits."
To become a NRST compliant state, they will be extending there own tax base to cover services as well, as part of the converson to the NRST. That means that they will be in a position to collect state dollars from services.For a state to collect the NRST there is no requirement to tax the same property and services. There is really no incentive to do so. To keep their sales taxes from being regressive they would have to set up some type of FCA. That ain't gonna happen.
Ahh, good, that means you will be investing and saving more too! But why stop at only 10%?Someone evading or avoiding the sales tax isn't saving or investing, they are consuming taxable items and not paying the tax. Try to grasp this concept. It's one of the (many) reasons your rate is too low.
The beauty of the FairTax is that you can control how much you pay in taxes. If you happen to save, invest or spend a portion on used [previously taxed] items, you can get easily get your effective tax rate below 9%, quite lawfully I might add.
That ain't gonna happen.
Keep your crystal ball well polished I see.
Just a clue for you. The Fairtax(HR25) arose from the efforts of group of Texas businessmen in the first place. AFT is a Houston based organization.
So?
Try to grasp this concept. It's one of the (many) reasons your rate is too low.
Try to grasp this concept. 23% of expenditure is what the rate is.
Better start looking to cut federal government.
23%........... HR25 federal tax rate out of consumption expenditure
14.91% ..... rate if Social Security and Medicare were eliminated
14% .......... rate if Nat'l Endowment for the Arts were eliminated
11.9%........ rate if Dept. of Education were eliminated
10% .......... rate if welfare were eliminated
9.8%.......... rate if foreign aid were eliminated
etc.
So lets look at what the maximum it would take to fund those functions clearly authorized under Article I Section 8 of the Constitution, in current dollars:
http://w3.access.gpo.gov/usbudget/fy2001/guide02.html#Spending
- $334 Billion --- Defense & Military related expenditure
- $ 31 Billion ---- Administration of Justice
- $ 16 Billion ---- General Government
- $199 Billion ---- Interest on the Debt
=========================
$580 Billion ---- Total
Institute an across the board, Flat rate, single stage National Retail Sales Tax, which taxes all imports and domestic products with the same rate.
Replacing all current federal tax law with a retail sales tax would be 23% on new goods and services paid and receipted at the retail register. No hidden tax, no exceptions, exemptions everyone participates.
Such a tax acts in a natural manner to encourage the elimination of excess government functions through visibility of burden among all constituencies of the electorate.
The total federal government budget would move from $2,000 billions towards something less than $580 billions calculated.
The across the board federal tax rate on new goods and services would decline towards less than 6.7%.
As tax rate on sales decreases the economic burden on retail items, the sales volumes and growth in the economy would be tremendous allowing even further reductions in tax rates below that less than 6.7% theoretic level.
That is what I perceive as the ultimate achievements possible under a National Retail Sales Tax structured in the manner of the revenue bill H.R.25. Simple common sense applied to the principal of TANSTAFFEL,( no free lunch, everyone participates in paying their way in proportion to the benefit the extract from their consumption.) encourages the natural change in attitudes required of the electorate as regards the burden of government largess in their lives.
- It is fairer to tax people on what they extract from the economy, as roughly measured by their consumption, than to tax them on what they produce for the economy, as roughly measured by their income
Hmmmmmm....... It's do able, with time and effort, once the blinders are removed from the electorate.
Try to grasp this concept. 23% of expenditure is what the rate is.Really? Did I miss a vote? When did this bill pass?
In such condition everyone is made more poor -- Prosperity depends not only on Enterprise but also a high general regard for Law and Regulation. When citizens understand laws -- a deep and detailed understanding -- and regard those laws as good and fair, they then abide the laws with low costs and minimal burden to Freedom.
Abominations of Law like the Spanish Codex, like the IRS Code bring only costs, burdens and chaos -- the economy is paupered and Enterprise is chained and choked to the point of being barren.
So no worry, with failure of HR25, you will be able to continue to pay income/payoll taxes, at both the front end and embedded into the price of all goods and services you purchase as well.
"A hand from Washington will be stretched out and placed upon every man's business; the eye of the federal inspector will be in every man's counting house....The law will of necessity have inquisical features, it will provide penalties, it will create complicated machinery. Under it men will be hauled into courts distant from their homes. Heavy fines imposed by distant and unfamiliar tribunals will constantly menace the tax payer. An army of federal inspectors, spies, and detectives will descend upon the state."
-- Virginian House Speaker Richard E. Byrd, 1910, predicting the consequences of an income tax.
So it's a dead issue.
So it's a dead issue.
A marginal tax rate higher than 23%, certainly is. Just as dead as the Budget Enforcement Act and Paygo rules are.
23% is what is in HR25, it is up to the electorate to push the legislation forward as it always is for any change in favor of reducing government power.
Well, the electorate isn't with you in your efforts to put government spending on a diet. They see you as tilting at windmills. And I don't think congress is with you either.
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