In the post, The Shadow Economy, we focused on the underground economy of one year, 2017. The calculation of all these numbers were given step by step in that post, and we use those percentages here to apply to the cumulative tax chart. The 21.76% is a low estimate of the underground economy because it does not reflect the additional factors we discuss here, or criminal activity beyond tax evasion because the International Monetary Fund did not consider these activities in their report. All of these factors increase the level of the underground economy, and money not in the tax system.

GDP of $19.4 trillion x 21.76% = $4.22 trillion in the underground economy in 2017.

If we examine the cumulative effect of this formula over a 10 year period, what we see is shown below.

  • Unregistered businesses would have paid an additional est. $3 trillion in taxes excluding payroll taxes which could have been saved for storm, wild fire and other national emergencies.
  • Collecting those unpaid individual taxes would have PAID the budget deficit the above 10 year period and $3 trillion dollars of the national debt. 
  • There are more people NOT paying taxes than do.

The International Monetary Fund lists, in its updated report from January 2018, the causes of a shadow economy as one or all of the following:

  • High tax and social security levels encourage payment ‘off the books.’
  • The ‘efficient and discretionary application of the tax code and regulations’, or lack thereof, in a fair and consistent manner. This can apparently be more important than the burden of high taxes and burdensome regulations.
  • The corruption or effectiveness of our public institutions, most particularly the IRS and its ability to enforce the tax code and do it fairly. Regulations such as labor market, or trade barriers, that substantially increase the labor costs stimulates a shift to the shadow economy.
  • An increased underground economy eventually reduces the federal and state revenues while the quality of public services and rule of law deteriorates. When the response to reduction in revenues is an increase in taxes for poor public services, an increased number of individuals and firms move to a shadow economy
  • The higher the unemployment rates, the lower the incentive to work in the underground economy
  • The higher the rate of self employment, the higher the probability to work in the shadow economy
  • The larger the agricultural sector, the more possibilities to work in the shadow economy
  • The larger the shadow economy, the more cash per capita is used outside the banking sector, usually measured as M0/M1 or M1/M2.
  • The higher the shadow economy, the lower the rate of participation of the labor force
  • ‘A larger shadow economy is associated with more economic activities moving out of the formal economy, hence, it shows a decrease in economic growth’ as measured by the GDP per capita. The lower the GDP per capita, the larger the shadow economy.’  As 2009 through 2014, the GDP per capita for the US was below 2008 levels, we can view that as pressure on economic activity to move into the shadows.

SOME elements in our government or social structure that are specifically applicable to the measurement of the Shadow Economy as indicated above are as follows:

  • We have more than one IRS employee who in delinquent with his taxes; this presents a picture of selective application and corruption.
  • In addition, the Lois Lerner debacle was indicative of an unfair and corrupt form of enforcement of the tax code and the lack of interest in prosecuting her in accordance with the government’s own policies is seen as special treatment. The unfair and inequitable application of the tax code is felt to be a major influence in the growth of the underground economy, and these two examples cited alone would increase the share of the underground in our total GDP to higher levels than we have projected above.
  • Between December 2008 and October 2014, Obama ‘printed’ an additional $4 trillion dollars, which the International Monetary Fund’s research interprets as a demand for more money by the underground economy.
  • More incentives to go underground emerge from a higher tax burden and labor cost. In some states, the  maximum income tax rate is 56.1 % (43.6% federal + 7% state such as New York) None of the state taxes have been factored into the above chart, and there are only 7 states with no income tax and only 5 states with no sales tax.
  • Rule of law matters. Lack of respect for immigration law and law enforcement personnel is just the first step to a country that allows gangs to run a neighborhood and kill with impunity. The underground economy is a part of this lack of respect for the law.

There are more examples that point to a strong and well established shadow economy here in the United States, far larger than previously thought.  However, our point is this:  we cannot allow this kind of systemic infection to destroy what is good in this country. Tax payers vote generously to fund and support all the social programs in which many of the underground economy participate unfairly.  The larger this underground population grows, the larger the voting block becomes to vote for increases in the social programs in which they participate and for the increased taxes to pay for them.   

Tax payers work up to 6 months to pay for the freedoms we enjoy, and a large segment of our country expects others to pay their share. In the final analysis, tax payers are paying more than double the taxes while others cheat and pay none.


Since this is an era when many people are concerned

about ‘fairness’ and ‘social justice, what is your ‘fair share’ 

when someone else worked for it?”

Thomas Sowell, PhD




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