The Outlook: Unearthing the Underground Economy
WASHINGTON -- One of President Reagan's longstanding beliefs is that the government can reduce its deficit by mining uncollected revenues from the underground economy. The Treasury's proposal to simplify tax laws and lower income tax rates will get at some of the "$100 billion of tax that is avoided in the United States" each year, he contends.</br></br>Over the last four years Congress and the administration have taken a number of steps to police tax evasion and slow the growth of the underground or "off-book" economy, where transactions often take place in cash and aren't reported to the Internal Revenue Service. The Treasury believes these actions already are starting to reduce tax cheating, although the IRS doesn't have much evidence to back this up yet. Reducing the complexity and perceived inequity of the tax system would increase compliance further, the Treasury argues. Virtue would be its own reward: A fairer tax system would boost economic efficiency and make tax evasion less attractive.</br></br>The underground economy has intrigued economists and politicians since the mid-seventies, when some analysts began to notice a sharp increase in evidence of subterranean activity -- which ranges from dope dealing to a carpenter's failure to report income from moonlighting. Analysts theorized that the increase in unreported income was a response to rising inflation, which forced many taxpayers into higher tax brackets, and growing disenchantment with the complexity of the tax system.</br></br>Since there's no uniform definition of the underground economy, economists disagree sharply about how to measure it and how to gauge its impact on the nation's output, employment and savings. Estimates of the subterranean economy's size range from 3% of gross national product, the value of the nation's output of goods and services, to 30%. The government's estimates tend to be at the low end of the range.</br></br>While economists squabble over the size of the underground economy, politicians and tax collectors are unified in their desire to collect their share of these unreported revenue streams. IRS studies show that tax cheating is a huge, endemic problem.