The Underground Economy

We've all heard of it. We've probably even all participated in it. But most of us have never really thought how much the underground economy it affects the overall economy of the United States. This paper examines what is meant by the term and places the underground economy within the context of all economic activity in the United States today while attempting to answer the question of how the underground economy might be eliminated.

The term "underground economy" actually refers to at least two distinctly different kinds of economic activities, both of which are "off the books". The first kind of underground economic activity is the one usually referred to by economists: Services or goods that are legal to obtain but that are paid for in cash (or whose purchase is in some way concealed in the process of recording expenses) often to avoid paying taxes. For example, many people pay their housekeepers, babysitters and lawn services in cash or with personal checks and so avoid paying payroll taxes. Sometimes this is done intentionally to avoid the taxes, sometimes it is done in simple ignorance (in part because the tax laws regarding whom may be considered an independent contractor and so exempt from such taxes are complex).

Those analysts who argue that the underground economy should be eliminated is that it costs the government, and in a democracy by extension the rest of us, millions of dollars in lost revenue. For example, a recent study of the underground economy in Calif

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