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A Reviewers Notebook: The Subterranean Economy

John Chamberlain

Not so many years ago my 35-year-old horse Toy died in the middle of a frozen January. Digging a grave for him in the snow-blanketed ground with ordinary tools was a manifest impossibility. A man with a backhoe, hearing of my plight, offered to do the job for me. I was about to ask his name in order to make out a check for an agreed-upon $100 when he said, “If you have ninety dollars in cash I’ll take that.”

I don’t know whether that $90 ever figured in the Gross National Product, but I have wondered about it. Similarly I wonder about the incomes of all those street hawkers who sell everything from women’s handbags to polished red apples in and around Grand Central Terminal in New York City. In businesses where there is little overhead and no documented inventory how much of any given transaction produces a statistic that is recorded?

At the other end of the scale we have computers spewing out thousands of documents that go into files far too voluminous for any correlation. In a suggestive book called The Subterranean Economy (New York: McGraw-Hill, 187 pp., $19.95), Dan Bawly, an executive partner of an Israeli certified public accountant firm, says that Americans produce 72 billion documents annually. There are, so Bawly tells us, approximately 18,000 papers for every white collar worker in the United States, and the total number of records, vouchers and other documents on file must exceed three billion.

As an international accountant with business in Europe, America and the Middle East, Mr. Bawly has good reason to believe that no Gross National product statistics are reliable. Between unrecorded transactions, mislaid files and untotalled slips of paper, the job of making a science of macroeconomics becomes a joke. In computer language, it’s “garbage out.”

Just Getting Even

There can be no science without measurement, said Lord Kelvin, and Mr. Bawly would be the first to admit that The Subterranean Economy is not a scientific book. But he is satisfied in his own mind that, with the proliferation of tax-consuming and inflation-creating welfare state bur eaucracies, thousands of individuals have come to regard their political representatives as crooks. Tax evasion is no longer regarded as immoral; it’s just getting even.

To describe the new attitude, Arthur Seldon of the Institute of Economic Affairs in London has coined a new word. It is “avoision,” compounded of “avoidance” and “evasion.” Tax avoidance has always been legitimate. But now Mr. Seldon sees a moral blurring of avoidance and evasion. The higher the tax rate, the more popular the “avoision” schemes.

The Gross National Product statistics either underreport or totally exclude many activities that should be relevant to any meaningful science of human action. Mr. Bawly lists a few of these activities. There is, first of all, moonlighting. In both Europe and the United States there is the illegal employment of aliens. Barter is a big item. There is tax evasion through manipulated expense accounts. And there are the myriad “laundering” activities related to the dope traffic and the cultivation, in California and Hawaii, of big unrecorded cash crops of marijuana. Money from heroin, cocaine and marijuana passes from hand to hand and into bank accounts for subsequent “laundered” investment in legitimate business. And where is the farmer who is meticulous about recording roadside stand sales? In parts of Canada, for example, the unrecorded exchange of farming, fishing and forestry commodities only rarely leaves an audit trail the Ottawa government can pick up.

The “guesstimates” of the extent of the American underground economy naturally vary. Fortune magazine has figured that $50 billion a year in taxes are lost to government. In 1976 the Internal Revenue Service said the covert economy was approximately one-tenth of the surface economy. In 1981 the Department of Labor estimated that nearly one in twenty workers held more than one job during a particular survey period. Presumably, much of the “moonlight” income went unreported. The General Accounting Of-rice has estimated that some $30 billion in taxable income remains “off the books,” which means a substantial loss in annual Federal income taxes.

The probability is that government estimates of the underground economy err on the conservative side. If “authorities” were to admit their inadequacy to the job of tracking down every unrecorded dollar, it might encourage more people to be more brazen about practicing “avoision.” Police state measures would then be necessary, and the American people wouldn’t stand for that.

Tax Avoidance Is Common In Other Countries

In other countries there is less reticence in speaking about “avoision.” Despite the recent jailing of Sophia Loren on a tax evasion charge, the Italians boast that their underground economy has saved the nation from collapse. In spite of the fact that the Italian government in 1978 was close to bankruptcy, the country imported more Rolls-Royce cars and caviar than any other Common Market nation. It was second only to Britain in its consumption of French champagne. There is much less labor unrest in Italy’s clandestine businesses than in the open economy, where the Communist unions are strong. The presence of moonlighting in Italy gives the entrepreneur access to a flexible labor force that is. willing to work over-time. There is no registered glove factory in Naples, yet this city exports five million pairs of gloves annually. The unmeasured Naples shoe industry is supposed to be just as large as the glove industry.

Macroeconomic data in Italy are meaningless. Things are not much different in France, where a quarter of the 25 million labor force is thought to be in moonlighting. Unrecorded labor in France has, says Mr. Bawly, contributed materially to the construction of highrise buildings in cities from Paris to Nice. Pay in the unrecorded economy goes up, with the employer and the employee sharing the amount of tax avoided between them.

In supposedly moral Britain the “unmeasured” economy is estimated as 7.5 per cent of the surface economy. Scotland reports an unemployment rate of ten per cent, but the London Economist suspects the figures. The “largest industry north of the border,” says the Economist, “lies in the penumbra of services relating to providing Bed and Breakfast, and most of them avoid the taxman’s eye.” And the illicit whisky still in Scotland has always been a healthy sector of highland output. As for fish, “far more are landed than are officially sold.”

The underground economy, says Bawly, will continue to grow until the Welfare State is cut back. It is as simple as that.

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