The Shadow Economy

The US Shadow Economy (undeclared income of any kind not reported on taxes) became an estimated $2 trillion dollar economy or an estimated 18%-19% of the total US GDP in 2011 (smartasset.com), and has almost doubled at $3.7 trillion dollars at the end of 2017. This represents an enormous loss to the American people and our infrastructure, and assessing its causes, dimensions and how it is influenced is a critical part of any solution.  Recent research by Friedrich Schneider with Dominik Enste for the International Monetary Fund tied the increases in the shadow economy to various economic measurements:

  • ‘it was estimated that the shadow economy size increases by 11.7% if the tax burden is perceived as more burdensome, with as little as a one point increase on a 1 to 7 Global Competitiveness Survey scale ’ (smartasset.com
  • ‘among 84 developing, transition, and advanced economies, a one point increase in a regulation index (ranging from 1 to 5) is associated with a 10 percent increase in the shadow economy.
  • some studies have found that it is not higher taxes per se that increase the size of the shadow economy, but ineffectual and discretionary application of the tax system and regulations by governments.
  • analysis shows’ for the United States, ‘that as the marginal federal personal income tax rate increases by one percentage point, other things being equal, the shadow economy grows by 1.4 percentage points. Also, holding down the top marginal income tax rate may prevent further growth of the shadow economy.’ (IMF.org )
    • In essence, the research tells us that a flat tax or close to it, fewer regulations, and effective, fair application of the laws and the regulations we require will be the secret to reducing the growth in the shadow economy.
  • But it is the size of the American underground economy we need to examine closely. If the 18% figure for 2011 is reasonable, and President Obama added 20643 regulations in his administration, then on that metric alone the regulation index would move at least a conservative 1 point.  AT LEAST!  According to the IMF research, this would add to the above 18% shadow economy another conservative 10% which puts the shadow economy at 28% without considering the effect of income tax rates.  Evidence points to it being higher than reported in smartasset.com.    If we wanted to go for accuracy, we might say those 20643 new regulations brings us closer to a 4 point move… meaning it moves 40%?  I do not even have the nerve to go there but it gives you an idea of HOW conservative our 1 point is.  
  • According to the Bradford Tax Institute, ‘’The Obama administration’s American Taxpayer Relief Act of 2012 increased the highest income tax rate to 39.6%. The Patient Protection and Affordable Care Act added an additional 3.8% to this making the maximum federal income tax rate 43.4%.”This does not consider the state taxes which are, in some cases, 10%  bringing  our tax rate to the grand total of 53.4%.
    • So in our IMF theory, the influence factor from taxes would be a 4.6% increase from 35% bringing the top tax rate of 2011 to 39.6% and the additional 3.8% from Obamacare. These two tax related increases added together and multiplied by 1.4% triggered by increase, equals 11.76%. IF we are to carry this theory to its logical end, we see that the $2 trillion dollar underground economy of 2011 increases by a minimum of another 11.76% of GDP after ObamaCare is enacted. So the 10% from increased regulation plus the 11.76% increase from additional taxes gives us a
    • GDP of $19.4 trillion x 21.76% = $4.22 trillion– 20% for tax returns with deductions to zero or below leaves
    • $3.376 trillion in the underground economy in 2017, but could be as high as $6 to $8 trillion if I were brave enough to say so?
    • We have a shadow economy out there that is roughly 17% plus of our GDP and that is so conservative it is laughable. It is literally heartbreaking when we combine this information with the tax statistics available for 2017. The 2017 tax receipts as a percentage of GDP was 17.59% or $3.316 trillion dollars; individual income tax contributed $1.587 trillionThe underground economy if taxed at the same level as the American people, they would pay  almost as much as we collect from our tax paying citizens.  
    • To me, all the math means this: Approximately 45 percent of our population pay no taxes at all, yet vote on what other people should pay in taxes and fees which is a questionable position ethically. These people keep us in debt because they pay no taxes, and our tax system rewards this by sending them money because they are below the poverty line when the IRS does NOT measure household income?  This is beyond madness!
    • Freedom isn’t free. We pay for it in blood, sweat and treasure, and this cost should be shared equally among all who live here, and dare I say it, EVEN THE POOR with a symbolic payment of $1.00. NO ONE SHOULD HAVE A ZERO TAX BILL, corporations included… businesses should have a minimum tax of $10, $100 or $1000 based on size.  It is fair given they are allowed to do business in this country.   If we value the futures of our children and their children’s children, we need to address this underground evasion of taxes, as well as this idea that some people deserve to be supported by other people. There are some serious problems here that are being ignored.  Lastly, all of these estimates were on the conservative side. It is highly likely there are far more dollars in our underground economy than I have nerve to defend.

True patriotism isn’t cheap.  It is about taking on a fair share of the burden of keeping American going.

Robert Reichs

Continue with part two, Do The Math and part three Shot Me Down.


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