Taxes: Underground Economy


Spring's just bursting out all over these days…even in the midst of summer. That is, for us libertarians it is: the tax revolution is still growing, the battle between the producers and the takers rages on, and major anti-tax movements drive toward victory in at least a score of states.

Another bright spot is the growth of what some call the "subterranean" economy, better described as the "free market" economy. This is the gigantic—and growing—aggregate of productive, remunerative interactions going on all around us…none of which is reported to the government or IRS.

Back in March and April a little tempest raged over the untaxed sub-economy. It seems a Professor Peter Gutmann of the City College of New York ran a study on the amount of cash coursing through the American economy—which is so necessary to lubricate the free market economy—and found the demand for cash has been far outstripping econometric model predictions. Now why would that be?

Why? Because people are becoming ever more cynical and jaded about "our" government and its obscene tax burden. They are increasingly opting out, refusing to support it. This refusal to support the government monolith appears to us in two noble guises: the ever-strengthening tax revolt (above-the-board, as it were) and the growing, vigorous free market "subterranean" economy (a more personal, private road to tax reduction).

When Gutmann came out with his figures, there was a collectivist gasp: the admittedly indirect measuring devices he employed pointed to an untaxed American economy of about $195 billion. Or about 10 percent of the entire Gross National Product. The actual total could well be more.

The extent of this dynamic sub-economy was documented quite well earlier this year when the "Chicago Better Government Association" set out to prove the awful dimensions involved. By setting up a fake business, then seeking out professional tax advice, they found that nine out of eleven accountants advised them to "cheat." There are doubtless plenty more out there: the free market invites everyone to participate to mutual advantage.

The development of the subterranean economy is every bit as revolutionary as the above-board tax rebellion sweeping America. And it appears to be growing just as fast. Quoted in Business Week in March, Gutmann explained that he used "an indirect measure based on the sharp increase in the growth rate of currency. And it indicates that the subterranean economy is huge and growing rapidly."

The reason only indirect measures can be used is that those who enter the untaxed sub-economy are understandably circumspect in their public (and private) conversation. The IRS has a program where people are paid for informing on their fellows: the reward can be up to 10 percent of extra taxes collected. And in 1977 more than $360,000 was paid out to collect $14.9 million more in taxes. Paranoia is not called for—reasonable constraint is.

Who are those guys participating in the alternative economy? They appear to be a substantial and growing chunk of the American people: lawyers, small businessmen, moonlighting workers, flea marketeers, doctors, garage sale capitalists, farmers, barter lovers of all stripes…a social prism reflecting our society. In short, anyone who has access to non-traceable cash money in the course of his business.

For the free market partisans involved, being careful means first and foremost not having ugly records which can be grabbed by some arm of the government, most notably the IRS. These include bank and checking accounts, the totals of which over the year do not square with reported income. Instead, only cash is used, and it is kept in safety deposit boxes, private safes or vaults, or simply hidden in safe places (those without good imaginations in this area may pick up the book How to Hide Almost Anything by David Krotz, at their local library or bookstore).

Waitresses and other workers who receive large amounts of cash in untraceable tips are particularly active in this area—no one ever reports the entire amount of his tips. Those who report a set amount per month are often caught, as are those who continue to place the unreported cash in bank or checking accounts.

On the other hand, many band together within a single workplace and mutually agree to report only set percentage of the true amount of tips. The resultant fluctuation is an accurate—but shrunken—mirror of actual receipts.

Among those who own small businesses—groceries, restaurants and the like—a common ploy is to destroy end-of-the-day cash register tapes which reveal the amount of cash taken in. Only a portion of the true gross is then reported.

However, the absence of such records is a clue in itself. Other businessmen and women "ring out" cash registers several hours before the end of the day; the resulting register tape becomes the "official" record of money grossed. The rest of the take for the day is pocketed…and enters the sub-economy.

Such untaxed and unreported cash is not used to buy things which are obvious or readily traceable. Instead, it goes to pay for concerts or other entertainment, illegal substances such as recreational drugs and laetrile, gambling, gamboling, groceries, vacation spending, etc.

Other free market economy aficionados are jumping into arrangements such as barter and barter clubs with the fervor of born-again entrepreneurs. Dentists trade off healthy teeth for flying lessons; lawyers watch out for the affairs of local grocers in return for healthy rutabagas and other delicacies; farmers—notorious for having tremendous legal tax breaks and even then not bothering to report more than about 50 percent of their income—trade pigs, cows, crops, seeds, just about anything for what they need.

Then there are the flea marketeers and garage sale capitalists. How much of that cash money flowing so freely gets reported to local, state and federal authorities to be taxed? Little, if any. Even when payment is made by check, many go so far as to cash the check at the check-writer's bank, thus making it just about impossible for government agents to trace.

Why is this happening? Why the "huge and growing rapidly" phenomenon of the free market, untaxed, unreported, subterranean economy? Phillip Cagan of Columbia University, who did research into cash-demand in the early 1960s, put it this way: "We are beginning to pay the long-run costs of heavy taxation."