Edgar L. Feige, the retired economist still opining from his base in Wisconsin, seems to be the only person interested in the underground -- economy, that is. In an
interview with the Gail Fosler Group, Feige's focus is on a $500 billion "gap" -- i.e. dollars that the IRS fails to collect annually because an increasing number of people fail to report their income accurately.
Calling it a "gap" has not succeeded in rousing main stream media attention, perhaps because, considered objectively, people managing on their own, without government intervention is not really bad news.
But, while I don't agree with Feige's conclusions, which stem, as is typical of economists, from the fact that under-reporting of any kind is seen as a detriment to their science, some of his observations are worth noting.
There is no question this shadow economy has been increasing dramatically in the last two or three years. But it has also been steadily increasing in the last decade. Basically if you take 1997 as a base it looks as though non-compliance has probably doubled from mid 1997 to 2011.
Feige goes on to say,
What’s really important is the estimated non-compliance today approaches what it was during World War II when we had strict price controls and rationing and consequently the largest underground economy on record.
without giving any apparent consideration to the possibility that rationing is now, as it was then, the causative agent. Rationing prompts hoarding, regardless of what is being rationed -- eggs or butter or dollars. Instead, he blames tax rates and audit rates,
The higher the effective tax rate, the higher the incentive to try to evade it. The lower the IRS audit rates, the higher the incentive to evade.
explanations that simply aren't supported by the fact that lowering tax rates for high earners has not had the opposite effect. To the extent that Feige's advice has been followed, the only obvious result has been that the Treasury collects fewer dollars directly and the deficit, the difference between what is dispensed and what comes back, grows. Which is to be expected when lending to the Treasury is rewarded with dividends.
But, being an economist, Feige sees evasion, people hiding things, everywhere, wven when what he's observing are neutral facts. For example, he says,
If you look at the Fed’s own flow of funds data, its official number ranges from 37 percent to 40 percent of U.S. currency that is overseas. But confidential information from the New York Fed suggests an even smaller amount is there. That coupled with my own data, which trace funds flowing overseas and coming back, more directly suggest that number is actually closer to 25 percent, which means a larger amount is un-reported in the U.S.
instead of concluding that we actually have more money available to mediate our transactions and fewer debts to overseas interests, which is a good thing, if satisfying the needs of our own people is our top priority. It isn't for Feige. He just wants the dollars to be counted accurately.
And he wants to moralize. So, he claims,
The bad news is that, to the extent there is this evasion, it redistributes income away from honest taxpayers to those that are dishonest, and that clearly has a demoralizing effect.
and I can't agree, because I am not demoralized. In fact, I will freely admit that I give people money all the time without telling the IRS that I did it. Why? Because, like the one million people, who don't bother to file returns to reclaim the dollars collected from their pay checks they don't actually owe, I consider my time to be more precious than dollars and I don't want to waste it. The "time = money" equation is false.
And he wants to keep track, which he wouldn't be able to do if the single Automated Payment Transaction (APT) tax he proposed at the end of the 1980s were implemented and which is why he now wants an add-on, to complicate the revenue streams even further.
I would now prefer to see the APT as a revenue-neutral added tax used to significantly lower corporate and individual income tax rates by using the revenues obtained from taxing financial transactions to both reduce the deficit and reduce the income tax rates on corporations and individuals.
One is tempted to conclude there's not a hair-breadth of difference between the practitioners of the dismal science and the denizens of Capitol Hill. They're all control freaks.
So, it turns out that it's not so much "foreign entanglements" we need to avoid, as local control. And there's no evidence, as far as I can tell, that Professor Feige has had anything to say about the Wisconsin legislature's assault on people within its jurisdiction, restricting their access to money.