What Is the True Cost of the Hidden Economy?

shadow economy

This is an interesting read, although I’m not sure what the agenda is here. Are they trying to say that more should be done to bring the shadow economy under the gaze of the IRS to increase tax revenue? Frankly, it will never happen.As long as cash exists, there will be people who use it to circumvent taxes.

Even without cash, there are still ways of getting arround anyone ever finding out about income. Bartering is a great example. I have a now-deceased relative who owned a paving business. He never once paid for a car the entire time he owned the business. If he needed to replace his current ride, or get something for one of his kids, he would pave somebody’s driveway for free in exchange for the car they were trying to sell!

I also disagree with the idea of using electrical usage to determine the size of the economy. There are too many factors that can undermine that estimation, such as energy efficiency measures and the fact that many side incomes can be done without using a single watt of extra electricity. Take a babysitter. Whether the babysitter comes to the children, or the children go to the babysitter, only one place is going to have lights on. So, less electricity is being used. Meanwhile, when the neighbor kid mows your lawn, gasoline is being used, but not electricity. Even worse, for that example, the same amount of gas is being used whether you paid somebody to do it for you or if you did it for yourself.

So, at the end of the day, the size of the shadow economy is probably vastly under-estimated. I’ve heard estimates that the underground economy is actually larger than the visible one. I doubt that is true either, but it shows just how useless trying to come up with a number is.

Infographic courtesy of Wallace & Associates APC.

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13 thoughts on “What Is the True Cost of the Hidden Economy?

  1. That infographic really makes you think. There’s something inherently unfair with a separate economy that isn’t subject to taxation, but I agree that you’re never going to get all of it under the IRS umbrella.

    I wonder if a simpler tax code combined with stiffer penalties for tax evasion might get most of the benefit.
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    • I doubt that tax code complexity is a contributor to tax evasion aside from confusion that even small jobs such as mowing are required to pay income taxes.

  2. Legalizing a lot of the things that make up the shadow economy, like prostitution and drugs, would go a long way towards generating revenues from those activities. As you say, there will always be people who exchange cash or barter but we could definitely decrease the percentage. I’m not sure that’s necessarily a good idea, but it’s worth considering.

    • I wonder what is the size of the shadow economy in Amsterdam?

      I agree that legalization would have the potential to bring those things into the regular economy, but it would depend on the amount of regulation and tax imposed on it. There is a ballot measure to charge a 24% tax on Colorado’s newly legal marijuana industry.

  3. Fascinating, and I love infographics. I doubt the veracity of measuring energy consumption for the black market. Do prostitutes really consume that much more energy than someone who just leaves the lights on??

  4. The best way to reduce this problem would be to legalize as many activities as possible (e.g. drugs, prostitution), simplify the tax system, cut taxes significantly and increase the penalties for evasion.

    Keep shifting the risk reward balance until the vast majority of people view the legitimate economy as the only option.
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    • The problem is that as long a cash exists it is simply too easy to hide it when it changes hands. Short of Gestapo-style investigation tactics, there are always going to be prior who don’t bother reporting. And are we really going to arrest the teenager who makes $20 a week mowing grass for not paying taxes on it?

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  7. Curios indeed. This infographic is full of important content that rings true and makes you stop and think.
    I wonder of the government will ever find a way to cast the darkness and bring light to this shadow economy. Do you know that prostitution in Singapore is legal, but various prostitution-related activities are not though. They actually ask them to apply for a work pass of some sort.

    • Transitioning to a cash-less society would go a long way to eliminating the shadow economy. There would still be bartering, but it would be very easy for the IRS to check that the money you received is equal to that you reported.

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