The Underground Economy:
Bring All Economic Activity into the Open


    About 10% of all economic activity in the USA is underground.
This means that these goods and services
are not subject to any regulations and are not taxed,
which puts a larger burden on everyone who follows the law.

    In other countries on Earth,
the percentage of underground economic activity
not recorded and not regulated is often higher.
Even many advanced countries of Europe
have considerable economic activity 'under the table' or 'off the books'.
And if everyone paid their taxes as due,
many of the economic problems of these countries would be solved. 











The Underground Economy:
Bring All Economic Activity into the Open

by James Leonard Park

    Some of the underground economy could never
come into the open because the behavior is against the law.
The sale and consumption of illegal drugs
would be the largest part of this economy in the USA.
Bringing such illegal activity into the open means bringing it to an end.
And a large portion of the criminal-justice system is devoted
to controlling precisely such kinds of consensual but illegal activities. 
If the sale of recreational drugs were brought into the open economy,
then these substances would be just as harmful to the users,
but the adverse impacts of the black market in drugs would disappear.
We have the example of the end of Prohibition:
When alcohol became a legal product once again in the United States,
the gang activity associated with the distribution of alcohol disappeared.
And the consumption of alcohol now provides
significant revenues for several levels of government.
But, of course, many harms result when people misuse alcoholic beverages.

    Prostitution is another large part of the underground economy.
Only a few countries on Earth have decided
to legalize and control the sale of sexual services.
When commercial sex is taxed, significant revenues are realized.
Bringing prostitution into the open has both benefits and burdens.

    But other parts of the underground economy
could be operated above ground.
People who do home repairs provide a legitimate service,
but when they do not pay the taxes due for such commerce,
then the honest people who pay all taxes
must pay more to compensate for the taxes not paid
by the various forms of underground business.

    Manufacturing clothing is another common underground activity.
Sweatshops spring up and disappear on a regular basis
in some ethnic communities.
When the employees do not speak the most common language
of their surrounding culture, they are easier to control.
They can be forced to work in sub-standard conditions for little or no pay.

    With the advent of the digital age, many copyrighted products
such as movies, video games, & computer software
are copied and sold without paying anything to the creators.
And no taxes are paid on the profits from such black-market activities.

    Everyone who buys a good or service from the underground economy
supports the continuation of such unregulated activity.
But individual consumers who are aware of black-market behavior
can report such activities to the most appropriate authorities,
so that the underground activity can either be shut down
or brought into the legitimate economy.

    For example, when a restaurant is not paying proper taxes,
the customers might notice indications
suggesting that the operation is not reporting its income correctly
to the taxing authorities and/or to other elements of government
that are supposed to supervise the working conditions. 


    All agencies of government that are working
to uncover underground economic activity are funded by taxes.
Regulators are employed by the taxpayers
to discover and reform underground business activity.

    One of the oddities of illegitimate business activity
is that all of them depend on having customers
who are parts of the above-ground economy.
Only a small part of the underground economy
sells goods and services only to others in the underground economy.
Most deal directly with the public.
And sometimes the people buying the goods and services
know that they are supporting the underground economy.

    One of the most common signs we see
is the request to be paid in cash, which cannot be traced.
But even some individuals and companies we pay by other methods
such as checks and credit cards
are also not reporting their income or paying all taxes when due.

    Since members of the public know about underground businesses,
it might be wise to offer rewards for reporting black-market activity.
The agencies responsible for detecting underground commerce
are already spending large amounts of money doing their work.
So it would not be much of an extension
to offer rewards to members of the general public
who come forward with information
that will lead to identifying people who are not paying their taxes.

    When we are asked to pay in cash, we should suspect
that we are being asked to take part (perhaps a small part)
in the underground economy.
We might be offered a discount if we pay in cash.
This is made possible by the fact that this business
will not be paying even a small percentage of their profits
as taxes to any level of government.
And they might be avoiding other costs of operating a legitimate business,
such as unemployment insurance or workers' compensation.

    Perhaps a reward of $1,000 would be reasonable
for information leading to bringing some underground activity into the open.
What agencies of government should pay such rewards?
And how should members of the public report black-market activity?

    Often the owners of legitimate businesses that follow all of the rules
know or suspect that some of their competitors are able to offer better deals
because these competitors are operating underground.
When a legitimate business is complying with all applicable laws,
the owners of that enterprise know what agencies of government
have been involved in licensing and inspecting their own business.
Is that back-yard auto-repair service complying with all relevant regulations?
The legitimate auto-repair company knows which agencies of government
are involved in licensing and supervising their own business.
Would it be a good guess that the individual who is secretly repairing cars
is not complying with all of the relevant regulations?
Is this individual or small group of workers
reporting all income and paying all relevant taxes?

    Many countries of the world have large underground sectors.
This involves widespread ignoring of the regulations on the books.
And most of the customers know (or should know)
that they are dealing with an individual or an enterprise
that is not registered with the appropriate government agencies
and is probably not paying taxes on its profits.

     Offering rewards for reporting underground economic activity
will have a significant front-end cost.
But once these individuals and businesses are brought into compliance,
the additional revenues will cover the cost of the reward.
This individual or business should be followed by the taxing authority.
If the new revenue stream ever dries up,
the authorities should check to see if this individual or business
has gone underground once again.

    In countries with widespread avoidance of taxation,
such rewards might be the best way to create a complete list of taxpayers.
And newly-compliant individuals and businesses
might decide to claim the reward for reporting their competitors.
A new ethos of following the rules might emerge,
replacing the old custom of never paying taxes.

    When people have kept their economic activity underground
because they benefited economically from operating 'off the books',
the new reward for reporting black-market activity
might be a significant motivation for reporting:
The carrots of reward might work better than the sticks of punishment.


    When any individual is caught possessing illegal drugs,
that individual is asked where the drugs came from.
And the local dealer can be taken into custody,
with the opportunity to reveal the next level of supply.

    Thousands of people are involved in the illegal trafficking of drugs.
The individuals involved in each transaction
know the means of supply above
and the people who buy the drugs next in the chain of consumption.

    Likewise, each link in the chain knows part of the cash-flow
from the final consumer back to the original producer.

    In exchange for a reduced sentence for drug-possession,
the user could help law-enforcement to arrest the supplier.

    Arrested drug-dealers could report their competitors,
without allowing themselves to be known by their competitors,
who will be investigated by the police.
Criminal enterprises keep themselves in existence
by violence against whoever threatens to disrupt their business.

    When drug-dealers are arrested, they might immediately wonder
how the police discovered their illegal behavior.
Were some customers recently dissatisfied to a degree
that led them to report the dealer to the police?
Did a competitor in the commerce of illegal drugs
disclose the identity and methods of other drug-dealers?

    When drug-dealers are caught, tried, found guilty, & sent to prison,
they are usually charged under the laws intended to control drugs.
But they almost never paid taxes on their illegal business.
And if the violation of income-tax laws were also charged,
there might be better compliance once these dealers get out of jail.


    Perhaps as part of the rehabilitation of former criminals,
they could be placed on a watch-list by the taxing authorities
to make certain that they begin to pay taxes after they are released.
If there are no tax-returns for ex-offenders,
they might have resumed their criminal activities to support themselves. 

    While they are serving their time for drug-offenses,
criminals who have been caught
could be offered training in legitimate economic behavior:
They could learn a useful trade.
And if needed, they could receive basic education
that will help them in any legitimate line of work
they might pursue once they are released.

    In Western criminal-justice systems,
there is usually a period of parole after release from prison.
The parole officer follows the new life of the ex-offender.
And one additional means of checking might be
to make certain that the ex-offender files income-tax returns.

    The various taxing-authorities that know about the ex-offender
should be told to expect a tax-return from the released prisoner
for the first year after release
and every year thereafter, of course.
The parole officer helps the ex-offender to find legitimate work.
And even if that job pays very little money,
there will be some tax-records of that income.
And even if the employee owes no taxes because the income is so low,
they should still be required to file income-tax returns each year.
This will allow them to claim any income that was withheld for taxes.
And even very low income is taxed for Social Security in the USA.
In the United States, the record of payroll-taxes paid will also show
that the ex-offender was employed in a legitimate occupation.
Part of each paycheck is paid to the Social Security Administration,
using the unique Social Security Number of the worker.

    Ex-offenders should come within the same system.
If and when they stop reporting income,
have they resumed some illegal methods of making money?


    Many European countries have very high official tax-rates.
But large numbers of citizens do not report all of their income
simply because they do not think it is fair to pay such high rates. 

    If and when official tax-rates were reduced in any such countries,
then better tax-compliance could be expected,
at least from citizens who would voluntarily pay taxes
if the tax-rates were fair.

    Tax-reform in the United States might also lead to better compliance.
Whenever people believe that the tax-laws are unfair,
they seek ways to avoid paying taxes. 

    Thus, for every country that collects taxes on income,
better compliance could be achieved
if all of the people believed that their taxes were reasonable.
There will always be some people who will try to avoid paying taxes.
And putting a few more of these into jail for tax-evasion
would be an example for others who are similarly tempted. 

    In the United States, the most glaring tax-inequity
is the lower tax-rate for 'capital gains' and other 'unearned income'
such as dividends and interest on stocks and bonds.
The people who have the largest incomes pay the lowest rate of taxes
because they can report much of their income as 'unearned'.
In the USA, the most sweeping tax-reform would close this loop-hole
by simplifying the tax-code so that
all income is taxed on the same progressive scale
Income could be defined as all money coming to the taxpayer.
If the money can be spent, then it was real income.
Profits from the sale of stocks or bonds can buy food, cars, or houses.
These dollars have the same value as dollars earned as wages.
So why not have the same tax-tables for all forms of income?
The greater one's total income,
the higher the marginal tax-rate should be. 

    Another dramatic tax-reform would integrate
the Social Security tax and the Medicare tax
into a single federal tax on income
For 2017, the Social Security tax is a flat tax on the first $127,200 of income.
Income above $127,200 per year in not taxed at all for Social Security.
Another on-line essay deals with such reform:
"The Social Security Tax: Reforming the Most Unfair Federal Tax":

    Taking tax-deductions is another way to reduce one's taxes.
Special interests have managed to insert into the tax-code
deductions that favor themselves.
If all or most deductions were eliminated,
then tax-preparation would be much simpler,
since there would no longer be any need
to keep track of all those expenses that are 'tax-deductible'.
And the tax-rates could be reduced since more income would be taxed.
How taxpayers spend their incomes should make no difference.
Why should income used to pay interest on a mortgage not be taxed?
Some people could never afford to buy a home
and thus never had mortgage-interest to deduct.

    And we could stop using the tax-code
as a means of distributing federal money.
If there is a legitimate program sending money to particular people,
let that money be sent in checks to those people,
rather than encumbering the income-tax code
with complex deductions for spending money in particular ways. 

    Let the taxpayers spend their money however they wish.
And let everyone pay income-taxes on a simple, progressive scale.

    Making taxation more simple and fair
would make enforcing taxation much easier,
since there would be no more ambiguity or court cases
about just what qualifies for a certain kind of tax-deduction.

    When our income increases, we usually get more tax-deductions.
The percentage we pay in all taxes goes down.
What sense does that make?

    Even when we have millions of dollars to give to charities,
we can still deduct these amounts from our incomes.
This means that other taxpayers are subsidizing such giving.
If we become rich, we might wish to donate money to special causes.
Would we really need a tax-deduction to encourage this giving?
And should all taxpayers subsidize the charitable giving of the rich?

    Tax-reform in every country with a complex tax-system
could require everyone to pay a new, fair tax on income.


    Especially in countries that have large cash economies,
where the underground transactions go largely unreported,
it would be wise to create and improve systems of withholding taxes
that are likely to be due at the end of the year.

    When the withheld money never goes thru the hands
or the bank-account of the workers,
the employees do not count this as their own money.
And it is simple to file a tax-return at the end of the year.
Taxpayers are pleased to get a refund
because too much was withheld during the year.

    One easy way to identify an underground business
is to follow the cash withheld for the payment of taxes. 
If nothing is withheld from each payment for work done,
then this business is probably not following the rules.
Sometimes the employer will 'withhold' money for taxes
but not actually pay that money to the government. 
The workers discover this at the end of the year
when there is no record of any payments on their behalf.


    Countries where tax-evasion is common
might tax other forms of wealth, such as homes and vehicles.
Even drug-dealers drive cars and live in houses.
So, even tho they might not pay any other taxes,
they are still paying gas-taxes whenever they fill up their vehicles.
And the places where they live are still paying property taxes.

    Wherever the surface of the Earth is owned by registered owners,
this is a possible source of income for government.
Income can be hidden, but land cannot.
And in advanced parts of the world,
the registration of real estate is a matter of public record.
And it is frequently possible to discover
how much a neighbor is paying in real estate taxes.
When taxes on real estate are not paid,
the government can take the property.

    Most advanced countries on Earth register motor vehicles.
Licensing vehicles provides revenue to the government.
And taxes on gasoline or other fuels are collected at the pump.

    Cross-checking should also be possible
as computer technology is more widely employed:
Are there people with expensive cars who report no income?
Do the owners of mansions claim to be living below taxable level?

     When one form of taxation is too easy to avoid,
then governments will have to be creative
in finding new ways to collect fair taxes from everyone.



    The contractor who is actually spending some time each week
doing home repairs or maintenance but being paid 'off the books'
might also be claiming unemployment benefits.
And when pollsters ask if they are employed,
they will report that they are not employed
This confuses the statistics for employment in many countries
that give money to workers who claim to be unemployed. 

    In contrast to some other advanced countries,
the United States of America probably has a lower rate of such workers.
But when they are discovered,
they should not receive any more welfare or unemployment benefits.
What cars and homes are owned by people receiving government checks?
Which 'unemployed' people are really spending like everyone else?

    Ending such illegal payments to people who are actually working
and collecting taxes when their employment is correctly reported
might eliminate the federal deficit in the USA.
8-10% of all economic activity in the USA is probably underground.
Bringing all legitimate economic activity into the open
will both reduce improper payments
to people who falsely claim to be unemployed
and it will add to the revenues collected by every level of government.
Some of this revenue will be paid to people who really cannot find work.


    Whenever new laws are proposed, especially with regard to taxation,
special thought should be given to
how these new regulations will affect the underground economy.
Money sent to foreign bank-accounts might be followed more carefully
to see if the underlying income was properly taxed. 

    Large amounts of electricity being consumed by 'homes'
might be a sign of some unreported and unregulated activity.
Even if the sweatshop is not paying taxes,
it is paying the electric company for the electricity used.
Taxing authorities should have the right to follow the electric lines
to uncover elements of the underground economy.

    Some locations have open-air labor-markets,
where workers and employers meet to contract for one day's labor.
These could be replaced by regulated hiring-locations.
The employers would all be registered.
When payment is made for the labor,
specific amounts are withheld and paid for all relevant taxes.
One simple way to close down illegal labor-exchanges
would be to record the license plates of all vehicles that pick up workers. 
Which of these employers are complying with all relevant labor laws?

    Legitimate labor-exchanges could register all of the potential workers.
The payments would be made to the labor-exchange itself,
which would deduct appropriate amounts for itself and for taxes.
The rest of the money goes directly to each worker.
And such labor-exchanges would be required to check to see
if their workers are authorized to be employed in that country.


    Because foreign nationals are not permitted to hold jobs in the USA,
they have largely found employment in the underground economy. 
But as they register with the Department of Homeland Security,
beginning with DREAMers in June 2012,
they are granted temporary permission to seek legitimate jobs.
No longer limited to a very narrow range of shadowy businesses,
registered foreign nationals can use their talents in better ways.

    As they emerge from the underground economy,
they establish honest relationships with the taxing authorities.
Some will begin paying income-taxes for the first time.
Legitimate employers automatically withhold money from each paycheck,
which is forwarded to Internal Revenue Service
and the Social Security Administration on a regular basis.

     And when foreign nationals reach retirement age,
they should be eligible for Social Security benefits just like all Americans.

America will be a better country when all people pay their taxes.
This reform is now Chapter 16 of Orderly Immigration: Creating a New America:
"The Underground Economy: Bring All Economic Activity into the Open".

Would you consider joining a world-wide Facebook Seminar
discussing this Internet book?
See the complete description of this seminar:

The discussion of all of the issues surrounding immigration reform
takes place in a Facebook Group called:
"Immigration Reform: Changing U.S. Laws":!/groups/431865303561834/

The essay above has also become a chapter in a book called:
Fixing America: New Laws to Improve the USA.
Find several additional ways to make a better future.

Created April 21, 2012; Revised 5-5-2012; 6-2-2012; 6-3-2012; 6-6-2012; 6-7-2012; 6-9-2012;
6-22-2012; 6-27-2012; 8-29-2012; 9-26-2012;
3-7-2013; 7-19-2013; 8-15-2013; 8-16-2013; 8-27-2013; 8-28-2013;
3-6-2014; 5-23-2014; 8-8-2014; 1-27-2015; 10-1-2015; 4-16-2016; 12-7-2016;


    James Park files income-tax returns every year,
even tho his income has been below the taxable income level since 1968.
As far as he knows, he does not support any element of the underground economy.
He pays most of his expenses by check or debit card,
which leave recorded trails of where his money goes.

    A few additional essays related to economic and tax-reform include:

Using Electric Bills to Make Everyone More Green .

The Social Security Tax:
Reforming the Most Unfair Federal Tax

Million Dollar Cap:
No One Should Get More than One Million Dollars Per Year from the U.S. Taxpayers

Go to other on-line essays by James Park,
organized into 10 subject-areas.

Go to the opening page for this website:
An Existential Philosopher's Museum

The views and opinions expressed in this page are strictly those of the page author.
The contents of this page have not been reviewed or approved by the University of Minnesota.