Taxes On $1.3 Trillion Slip Through IRS Fingers Each Year

Sunday, August 1, 2010, 9:51 AM | 3 Comments

There are two types of economies in a country – the Official Economy where GDP is calculated among other things and the Shadow Economy where the total sum is an estimate. In some countries, it’s cash economy and that can hardly be traced. The shadow economy is not necessarily all illegal but for the most part it is. According to IRS, any income is illegal if it is hidden from the tax man. That logic holds true in every country of the world.

However, it just so happens that every country has shadow economy. The U.S. shadow economy equaled 9 percent of the country’s official economy. Given U.S. GDP of $14.26 trillion, the world’s largest, that could still be as much as $1.3 trillion. The taxes on that high an amount slip through Uncle Sam’s fingers each year.

According to a report “Shadow Economies All Over the World: New Estimates for 162 Countries from 1999 to 2007” compiled by Word Bank, in 2007, for example, the biggest shadow economy is in the former Soviet republic of Georgia. The revenue from all Georgia’s goods and services generated off the books amounted to 72.5 percent of official GDP. There is 15% plus or minus margin of error.

Shadow economy is on the rise…

The one notable finding from the report is that from 1999 to 2007, shadow economies appear to be on the rise in nearly every country the study ranked. Who wins and who loses is the big question. If the tax money is not well spent on benefits targeted towards the general populace but is spent only on a chosen few, then the shadow economy must somehow be reduced to the level of non-existence. That is highly unlikely in any country if not utterly impossible.

Shadow economy can be good…

The shadow economy generally thrives when the tax man taketh but not giveth to spend on the general populace to better their living conditions and when that becomes the norm of the day. However, this kind of economy can play a big part in the development of a country. Sometimes, then, the hustle and bustle does get created by the shadow economy. Let’s face it. The world economy is for the rich only. They control the wealth [The rich control the wealth? – what a nasty thought] in a nation. Shadow economy or not, the basic premise of any national economy must be beneficial to the general populace. If it’s living conditions become healthier – financially and otherwise, then so be it. I then don’t see anything wrong with the shadow economy on the most part.

In a Nutshell
The authors suggest that “reducing the tax burden is the best policy measure to reduce the shadow economy, followed by a lessening of fiscal and business regulation.” In other words, by reducing the tax burden on the general populace, less money will be coming from official economy to the Treasury but more money will be coming from the otherwise shadow economy. Did I say that right?

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  1. 3 Responses to “Taxes On $1.3 Trillion Slip Through IRS Fingers Each Year”

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