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Rob Kailey is a working schmuck with no ties or affiliations to any governmental or political organizations, save those of sympathy.

Tax Cut Myth no. 342

by: Jay Stevens

Wed Aug 08, 2007 at 17:56:03 PM MST


I can understand why businesses want to pay less taxes. I do. After all, most business decisions - especially with the bigger companies - are aimed solely at the bottom line. There's no room for sentiment, such as education, health, or safety. That stuff has to be regulated by the government. Business doesn't give a rat's *ss about those things, even though its very existence depends on it.

Still, it's amusing watching local business advocates twist themselves into knots explaining why Montana business taxes are too high.

Take this article by the Big Sky Business Journal called, "Shadow Economy Keeps Business Off the Books," in which it's revealed that Montana businesses stiff Montana taxpayers at twice the rate of other states:

A recent article reported that " the Montana Department of Revenue in 2005 conducted a tax gap analysis for both individual income and corporate license taxes ? According to the DOR estimates, Montana's fiscal 2005 tax gap was $145 million to $195 million for individual income and $33 million to $45 million for corporate license taxes. The overall noncompliance rate was estimated at 18 percent to 22 percent for individual income and 26 percent to 33 percent for corporate license tax. That was much higher than the other states found and was a source of concern."

While the concern here was about the loss of tax revenues to state government, the underlying assumption is that easily a fourth of the state's economy could be "off the books." The state's gross domestic product - the amount of new products and services generated -- might easily be a billion dollars more than officially calculated.

The report implies that this "underground economy" is generally composed of babysitters and independent contractors, individual folks working and paying under the table, ignoring the fact that the majority of unpaid Montana taxes are from corporations, not your next-door neighbor.

What's equally amusing is the Business Journal's claimed reason for our growing underground economy:

According to many economists, it is the existence of underground economies that props up many third world countries. Those same economists theorize that underground economies grow in direct proportion to the size and oppressiveness of government. Without the functioning of underground economies the standards of living in these countries would be considerably worse than it often is. Even in the US, much of the underground economic activity stems from newcomers attempting to enter markets for which regulatory barriers are otherwise difficult, if not impossible, to overcome.

Forgetting for a moment that we don't actually live in an authoritarian regime (yet) and that we live in one of the most business-friendly countries on the planet (Cayman Islands aside), with the quick pace of deregulation under the Bush administration, you'd expect these underground economies to be shrinking, according to this theory. They're not.

The more likely explanation for the growing underground economy is two-fold: the increase of corporate cheats abetted by the recent administration's pro-corporate tax policies, and the increasing difficulty of starting up small businesses thanks to health insurance costs, lack of regulation ensuring fair competition, etc. (Think the deregulation of radio, for example.) More folks are taking odd jobs.

The Big Sky Business Journal's implicit solution - to lower taxes - obviously isn't the answer. As is readily apparent, those industries slipping through tax loopholes won't stop using the exits if tax rates go down. There's no incentive to pay their fair share, and every incentive to keep circumnavigating the system.

Personally I think we need to simplify the system, give real breaks to small businesses (universal health care!), and increase punitive efforts, especially against big businesses.

Jay Stevens :: Tax Cut Myth no. 342
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Other Causes (0.00 / 0)
I feel compelled to comment everytime you delve into economic affairs and this time I can't help myself.  With regards to this underground economy it appears that you haven't considered several alternatives with may explain the large percentage. 

First, the presence of legal roadblocks is a powerful deterant.  Dealing drugs is a prime example of this.  The income earned through this can not be reported because it will disclose the nature of the business.

Second, cash transactions.  Waiters earn a significant amount of money and though many report this income, some do not.  There is certainly incentive not to report this income, given the lack of regualtory oversight.

There are more instances where incentives for not reporting income are prevelant, but to lay the blame for the lack of reporting soley at the feet of businesses is irresponsible.  The regulatory environment that they must operate under is very rigid leaves little room to hide assets. 

Additionally, new businesses are not prevented from forming because of the high cost of providing healthcare. There is no current requirement that they do so and though this cost has increased in recent years, it is not a primary cost in doing business.


thanks... (0.00 / 0)
I admit I'm no economist and need correcting at every step. Thanks for the comments...

[ Parent ]
also... (0.00 / 0)
To erect a (weak) defense of this post, I will cite the numbers from the BSBJ's article -- that corporate tax noncompliance was signficantly higher than individual, as a percentage. So I don't know if I would call that claim "irresponsible." (Perhaps misguided, heh.)

And while something like healthcare isn't a legal requirement for a business, it is a real requirement needed to attract quality employees, without which a tech company, say, can't hope to get off the ground.

But you're right, of course: I neglected to emphasize the smaller, individual "underground" workers, mainly because the BSBJ focused on them...


[ Parent ]
Probably far off the mark (0.00 / 0)
I would say, first, that a great deal of the "underground" economy is not reported because the people carrying it out are not required to file income taxes--their income is too low.  Second, people in the underground economy dealing drugs and conducting other criminal activities would find it to their advantage to pay taxes, not avoid them.  The IRS, by law, cannot report illegal income to other government agencies, but the T-Men can get criminals (remember Al Capone?) and put them away for not paying taxes.  And finally, waiters and waitresses in most cases have to report sufficient tips to their employer to cover a certain percentage of the amount that their tickets charged the customer.  If they don't, the employee must then charge them for the difference and put it on their W2 so that they have to pay both taxes and Social Security and Medicare on it at the end of the year as well.  We do have two economies in this country but neither is an underground economy.  One is the national and international economy of the Stock Market and the multi-national corporations and those affiliated with them.  The other is the economy of the supermarket and the small and medium sized business trying to get ahead with difficulty.  We see it in Montana when someone earning $60,000 plus a year is considered to have a good income when, in the rest of the country, it is lower middle class.

You are a bit off the Mark (0.00 / 0)
$60,000 would not be lower middle class.  The average income in the U.S. is somewhere in the $40,000 range, so a bump of $15,000 to $20,000 would be considerable.  Also, economies are local at their core, so if you make $60,000 in Montana, then you are really concerned about your buying power relative to your neighbors.  Since the average in Montana is somewhere in the low $30,000, this provides you with a considerably higher standard of living.

With respect to the underground economy, I agree that waiters are required to report income, but it is easy for many not to.  There is little fear of capture by the state and no incentive for many to report.  Drug dealers could report their income, but the very nature of their work makes them fear oversight from the government, justified or not.  They are in no hurry to cooperate with a government which is trying to put them out of business.


[ Parent ]
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