Going Underground: America's Shadow Economy

frontpagemag.com ^ | Jan 6, 2005 | Jim McTague

[pigdog]

Going Underground: America's Shadow Economy By Jim McTague Baron's | January 6, 2005

America has two economies, and one is flourishing at the expense of the other. First, there's the legitimate economy, in which craftsmen are licensed and employers and employees pay taxes. Then there's the fast-growing underground economy, where millions of nannies, construction workers and others are paid off-the-books, their incomes largely untaxed. The best guess as to the size of the output of this shadow economy is about $970 billion, or nearly 9% that of the real economy. It should soon pass $1 trillion.

What is largely fueling the underground economy, experts say, is the nation's swelling ranks of low-wage illegal immigrants. The government puts this population at 8.5 million, but that may represent a serious undercount.

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Measuring the size of the underground economy is, of course, more art than science, since most of its denizens seek to remain anonymous. But convincing anecdotal evidence and a number of credible academic studies suggest that it is expanding briskly -- probably by an average of 5.6% a year since the early 1990s, edging out the real economy.

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Ideas like that could well become food for thought for House Ways and Means Committee Chairman Bill Thomas of California. He wants to push ahead with tax reform this year, including the creation of a national sales tax and reduction of income taxes. In theory, a sales tax would capture the underground economy, since all wage earners have to spend money to live.

[pigdog]

Notice the discussion of just one part of the illegal economy that the IRS doesn't even measure. This all represents tax evasion as we speak and those who hype "massive evasion" etc. under the FairTax are certainluy misguided.

[pigdog]

An interesting article that shows the illegal economy is much, much larger than most people think.

[Map Kernow]

What is largely fueling the underground economy, experts say, is the nation's swelling ranks of low-wage illegal immigrants.

Wonderful. Another "benefit" of illegal, uncontrolled immigration: an "underground economy."

[/bitter sarcasm]

[concerned about politics]

Those living off government social programs also have ways of making money they don't claim. In Upstate NY, the democrats flock to the grape vineyards and pick grapes. They make a paycheck, but never claim it because they also want the tax payer money. They sell refurbished cars, too.
Men hit with massive child support payments prefer to work under the table as well. For them , it doesn't pay to work otherwise.

[cyborg]

Less money for the government to tax.

[Lester Moore]

What is largely fueling the underground economy, experts say, is the nation's swelling ranks of low-wage illegal immigrants.

Illegal's! Only not paying the taxes that U.S. citizens won't not pay.

[Mind-numbed Robot]

Only not paying the taxes that U.S. citizens won't not pay.

That was sort of hard to put together, wasn't it? :-)

[Mind-numbed Robot]

Less money for the government to tax.

Just means they will borrow more.

[Lester Moore]

Not correct grammar is it?

[Mind-numbed Robot]

Lester, I am mind numbed. I am too dumb to know.

[Milton Friedman]

Great article.

I wonder what the underground economy of the drug trade is?

[fire_eye]

What is largely fueling the underground economy, experts say...

Yeah. "Experts say". Like, as in, "Doctors agree", or "Sources say", right?

Hey, "Experts"... I got a clue here for you. "What is largely fueling the underground economy" is the fact that the Government is intrusive and tyrannical and oppressive, and tries to confiscate every bit of private property it can possibly get away with confiscating, from the rich man's businesses to the poor man's spare change.

[ClaireSolt]

Rhen there are the legions of failed entrepreneurs who are pushed under and held under by the IRS and their stupid unwillingness to settle bogus tax cases.

[Conservative Goddess]

I've not really looked at any of the studies which attempt to quantify the underground economy....but it seems to me that we could get a fairly close approximation by subtracting total reported income plus/minus the net change in savings from total consumption. Do you have any links to scholarly economic efforts to do this???? Thanks!

[Bigun]

Notice the discussion of just one part of the illegal economy that the IRS doesn't even measure.

Yes indeed! I happen to believe that the current communist inspired income tax system is at the root of the United States having the highest incarceration rate in the developed world in that it literally SCREAMS "Earn illegitimate income - it is tax free!"

[n-tres-ted]

Good work. We need to see more discussion of the problems with the existing tax system.

[ancient_geezer]

A Taxreform bump for you all.

If you would like to be added to this ping list let me know.

John Linder in the House(HR25) & Saxby Chambliss Senate(S25) offer a comprehensive bill to kill all income and SS/Medicare payroll taxes outright and replace them with with a national retail sales tax administered by the states.

H.R.25,S.25
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.

Refer for additional information:

• search: "national sales tax" OR "national retail sales tax" OR "fairtax"

[american spirit]

Another factor could be the welfare fraud that I believe is a huge factor in making it possible for illegals to purchase these expensive SUV's, houses and other high ticket items. I've seen people driving these Escalades, Yukons, etc. with a carload of kids stopping at Walmart in the middle of the day with both parents speaking nothing but Spanish........and I live in an area of Dallas with a fairly high cost of living.

One of the thriving businesses in our area are the document mills pounding out multiple ID's for these people and if I'm not mistaken there was a recent bust in Cal when millions of ID's were seized from an operation out there so I believe it to be a looming huge problem for us.

[ancient_geezer]

I've not really looked at any of the studies which attempt to quantify the underground economy....but it seems to me that we could get a fairly close approximation by subtracting total reported income plus/minus the net change in savings from total consumption. Do you have any links to scholarly economic efforts to do this???? Thanks!

I believe what you are describing is the BEA's AGI Gap figure.

Which is a measure of tax non-compliance with regard "legal sources". That however does not account for non-reporting activities such as off the book cash transactions and illegal sales & income. Criminals and Underground cash economy folk don't report either side of their transactions to government so there is no direct measure on such.

Here's a GAO symposium on the Tax Gap, that derives from that statistic and its ramifications:

 

GGD-95-157 Reducing the Tax Gap: Results of a GAO-Sponsored Symposium
... GGD-95-157 Reducing the Tax Gap: Results of a GAO-Sponsored Symposium ...
http://archive.gao.gov/t2pbat1/154381.pdf - GAO Reports

Background: Experts convened in January 1995 at a GAO symposium on the federal "tax gap" agreed that major changes to the current tax system were needed to improve taxpayer compliance with the tax laws. Available Internal Revenue Service (IRS) data suggest that taxpayers fail to pay about 13 percent of the federal income taxes due on income from legal sources. Among the recommendations: make tax laws simpler; extend the reach of tax requirements, such as income tax withholding, that promote taxpayer compliance; and improve IRS' ability to resolve compliance problems quickly. .

 

Analyzing what folks spend in aggregate by looking at business gross retail sales numbers in the NIPA/GDP data series, the discrepencies between consumption spending, credit, savings/investment and personal income are enlightening especially when compared with IRS tax reports.

Most uptodate "AGI gap" calculation on the BEA website:

Bureau of Economic Analysis, Supplemental table 7.19

National Income and Product Accounts Table

Table 7.19. Comparison of Personal Income in the National Income and Product Accounts with Adjusted Gross Income as Published by the Internal Revenue Service
[Billions of dollars]

Today is: 5/13/04   Last Revised on May 7, 2004

Line		2001	2002
1	Personal income, NIPAs	8,713.1	8,910.3
2	Less: Portion of personal income not included in adjusted     gross income	3,117.0	---
3	Nontaxable transfer payments	1,054.9	---
4	Employer contributions for employee pension                 and insurance funds	642.6	---
5	Imputed income in personal income	292.8	---
6	Investment income of life insurance carriers                 and pension plans	455.7	---
7	Investment income received by nonprofit                 institutions or retained by fiduciaries	69.0	---
8	Differences in accounting treatment between                 NIPAs and tax regulations, net	177.5	---
9	Other personal income exempt or excluded from                 adjusted gross income	424.5	---
10	Plus: Portion of adjusted gross income not included in     personal income	1,387.3	---
11	Employee and self-employed contributions for                 government social insurance	373.6	386.2
12	Net gain from the sale of assets	324.6	---
13	Taxable pensions	435.8	---
14	Small business corporation income	130.6	---
15	Other types of income	122.6	---
16	Equals: BEA-derived adjusted gross income	6,983.4	---
17	Adjusted gross income, IRS	6,170.6	---
18	Adjusted gross income (AGI) gap	812.8	---
19	AGI gap (line 18) as a percentage of BEA-derived              AGI (line 16)	11.6	---
20	AGI of IRS (line 17) as a percentage of              BEA-derived AGI (line 16)	88.4	---

Footnotes for
Table 7.19. Comparison of Personal Income in the National Income and Product Accounts with Adjusted Gross Income as Published by the Internal Revenue Service


1. Consists of the imputations included in personal income shown in table 7.12 except for employer contributions for health and life insurance (line 174). In table 7.19, these premiums are included in line 4.
2. Consists of income earned by low-income individuals who are not required to file income tax returns, of unreported income that is included in the NIPA measure, and of gross errors and omissions in lines 2 through 15. Also includes the net effect of errors in the IRS adjusted gross income (line 17) and NIPA personal income (line 1) measures. Such errors can arise from the sample used by IRS to estimate line 17 and from the source data used by BEA to estimate line 1.

There is good reason to believe the actual number including illegal trade and cash underground is much closer to being two to three times as much. After all NIPA:GDP data set only includes measures of transactions reported to government, it does not begin to measure transactions wholly unreported in sales or income.

The currently accepted figure of the illegal & underground economy for the US is 15-25% over GDP for all illegal and tax evasion and barter activity. In Europe that number ranges as high as 40%. 

[concretebob]

From "Underground Empire" by James Mills 1986 Doubleday
also wrote "Panic in Needle Park" & "Report to the Commissioner"

The inhabitants of the earth spend more money on illegal drugs than they spend on food. More than they spend on housing, clothes, education, medical care, or any other product or service. The international narcotics industry is the largest growth industry in the world....The international narcotics industry is, in fact, not an industry at all but an empire

Just my two cents..