The means and ways the underground economies are performing.
Black Market Babies live @ The Mercantile Dublin (Photo credit: SebastianDooris)
The underground economy
We can define the underground economy as comprising transactions that create value but are intended to escape something – taxes, revelation of bribes, bureaucratic red tape, exchange controls, criminal prosecution etc. it may be convenient to categorize underground economic activities in two ways-
i. transactions to avoid government – imposed impediments to the efficient conduct of business and to evade taxation; and
ii. Criminal transactions involving drugs, robbery, contract murder, prostitution, racketeering, and the like – basically economically motivated criminal activities. Escape means secrecy, and secrecy means that the transactions involved and the economic activity they represent are very difficult to measure – and sometimes escape measurement altogether.
The fundamental causes of underground economic activity can be outlined in detail.
First and foremost is taxation, which in some counties takes over 50% of nominal income. Swiss bankers have a saying, ‘there would be no tax havens without tax hells’. Obviously, as the rate of taxation increases, the cost of honesty also increases – honesty with respect not only to income taxation, but also to taxation of wealth, transfers of wealth, value added, sales and mandatory social insurance contributions. Tax evasion always involves financial secrecy, and often transcends national boundaries because of investigative and jurisdictional limits set for revue authorities. International cooperation in matters of tax evasion obviously exists but there are plenty of loopholes.
Second, is regulation, which may fix prices, wages, returns on capital , exchange rates, etc. each time a regulation is set an incentive is created to evade it, along with its symptoms such as queuing , rationing forced sales quotas, bans etc. in any counties, parallel financial markets , sometimes called curb markets, emanate directly from financial controls as do parallel foreign exchange markets involving currency smuggling and or over and under invoicing of international trade transaction – transfer pricing. All create economic activity that is neither taxed nor recorded in the official statistics.