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Few people recognize the obvious parallel between the underground economy and the Laffer curve.

When income and capital gains taxes are raised beyond a certain point on those with employment and investment income, they will as a matter of course, shift their investments and income away into lower tax brackets. This shift is so great that higher taxes can actually result in lower revenues.

But conversely, when the power of government shifts against the less wealthy, making it harder for them to work legally, requiring identity checks and lots of paperwork, and demanding too much out of their small pay, the less wealthy will just do a variation of what the rich do: shield their income.

If this means working in the “underground” economy, and to heck with government, so be it, as far as they are concerned. But until they can convince those with some money to be their underground benefactors, times will be somewhat harder.

The trick here is for small businesses to pay their underground employees “off site”, to keep the transaction as invisible as possible.

Of course, the more onerous and intrusive the government becomes, the easier it is to write them out of the equation entirely.

For example, ignoring illegal aliens for a moment, there are plenty of Mexican-American citizens, who often travel to Mexico to visit relatives. While there, they can do a brisk distribution business, bringing back all kinds of products that are hard to get in the US.

Such as high capacity toilets, and soon, 100W incandescent light bulbs (as of Jan 1, 2012), name brand pharmaceuticals at much lower cost, Cuban cigars, etc., etc.

This is because people will pay the extra dollars both to get the products they want, not just what the government wants them to have, and to anonymously tell the government to go get knotted.

Sure, it’s part of the underground economy, but in this case, it is a good thing.

More and more people will go into business themselves to get direct access to cash. For more intrepid but unsavory types, we will see more cooperative enterprises between illegal and legitimate business. The money laundering of drugs and other contraband via restaurants is always an oldie but goodie. Restaurants always under-report cash while dealers need a laundry.
Shopping at small retailers can also benefit consumers. Paying cash always seems to get a price reduction. I wonder why?
If 0bama wants us to be more like Europe, here is one way.