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You Can't Tax This

Put these three items together in your head and see what you find out. (Hint, the media have not discovered the connection, at least not to my knowledge.) 1) Official labor force participation is at an all time low. 2) Unemployment compensation limits, disability rolls and food stamp rolls are all way up. 3) The underground economy--the untaxed labor force--has doubled.

The underground economy is bubbling along nicely, a rivulet becoming a stream, becoming a river. According to a study by Edgar Feige of the University of Wisconsin the un-taxed, unreported income in the U.S. amounts to two trillion dollars a year. That is eight percent of the economy. It has doubled since 2009.

Business activity as measured by government labor statistics, meantime, is stagnant. Discovery's Scott Powell notes in an insightful article for the Philadelphia Inquirer, that "the U.S. economy as measured by the labor-force participation rate, which captures the percentage of working-age people in the labor force, has just dropped to a new 34-year low of 63.3 percent."

The result is a worsening long term deficit, even as the short term budget looks relatively improved. One reason to be concerned, as Powell points out, is that federal stimulus and the stock market response are not sustainable.

Unemployment benefits, a ballooning number of people on government disability rolls and successful recruitment of people onto food stamps have all combined to make regular work less attractive. Some former workers are not working at all. Many are (where else?) in a greatly expanding underground economy.

The underground, or shadow, economy has grown greatly in recent years and includes not only nannies and domestic workers, farm workers and lawn maintenance people who receive set fees, but also a large barter sector that trades car repairs for food, sewing for textile supplies, etc. Include many tips. Include yard sales that become a regular enterprise.

Before you blame the people involved you might like to ask why so much goes unreported. Do you think it might have something to do with the complexity and paperwork of the tax system? Do you think the incentives might be askew? We have some share of the working population that is not taxed on income, yet receive various federal benefits. We still don't know how bad it is.

You can email brucechapman@discovery.org

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