The underground economy

Date posted: May 27, 2013

The U.S. economy is currently measured as generating $16 trillion dollars annually in income. But some say this doesn’t tell the whole story, because some income isn’t reported. That is, it’s underground.  Do we have any estimates on the size of this under reported or underground economy? N.C. State University economist Mike Walden answers.

“They clearly are estimates, but the most recent estimate shows that about 9 percent of overall economic activity in the U.S. is really underground.

It’s not reported for taxes. That translates to about $1.5 trillion of economic activity. Now, if you look at that rate — 9 percent — compared to other countries, we actually look pretty good.

It’s almost one quarter of the total economy in Italy, Greece and Cyprus. It’s about 15 percent of the total economy in Germany, France and Canada. So we don’t look as bad compared to those countries, but clearly 9 or 10 percent of $1.5 trillion is an issue.

Now research shows that countries that have higher relative taxes, that have higher unemployment and higher regulations do have more of a problem with the underground economy. And of course that makes sense.

One benefit of going underground, of course, is that you avoid taxes and regulations. Of course, you’re also breaking the law. But I think this is something to consider when we do have debates about regulations and taxes. This should be one factor in that debate, the fact that usually when you change those tax and regulations for the upside, you may drive more economic activity underground.”

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