The Underground Economy and Tax Cheaters
A great Oklahoman once said, “The income tax has made more liars out of the American people than golf has.” Tax evasion exists when a person willfully and fraudulently conceals income so as to not pay a tax on it. To stop all tax evasion under the income tax system would be as optimal as hiring a police officer to stand on every street corner to prevent jaywalking. The cost outweighs the benefit.
The shadow economy, legal income-producing activities that are not reported to tax authorities, represents roughly 10 percent of GDP according to a 2000 survey. The “tax gap,” as the IRS calls it, was $345 billion in 2005. The underground economy, which consists of illegal activities performed by drug dealers and prostitutes, was estimated at 9.4 percent of GDP in 1994.
A consumption tax will not stop the underground economy from existing but the evaders will, unlike before, have to pay the tax whenever they purchase a double cheeseburger and fries. There lies the benefit for the honest taxpayer. Under the income tax system, the government doesn’t take the hit when crooks find ways to not pay the tax. Instead, the government increases the tax on those already paying it to make up the difference. Under a consumption tax, that will not be necessary and the dishonest will have to pay as much as the honest.
 Will Rogers
 Slemrod, p. 45
 Friedrich Schneider and Dominik H. Enste, “Shadow Economies: Size, Causes, and Consequences,” Journal of Economic Literature, 38 (March 2000), pp. 77-114
 Boortz, p. 93
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