The Underground Economy

April 30, 2013
United States citizens and residents are taxed on their worldwide income. All of it should be declared on an income tax return and be accounted for. To what extent does that happen? It happens more here than in Greece, but certainly less than in a perfect world. Click to read an excellent article by James Surowiecki from the April 29, 2013 New Yorker, which does a good job of summarizing the extent of the problem.

He gives small mention to large amounts of cash that have been spirited out of the country and invested in tax havens around the world. Treasury has broken into some of the Swiss banks, but there are a lot of other tax havens that have not been touched.

Why doesn’t the IRS do more to correct this problem? It tries, but the problems are huge. IRS has to administer an obscenely complicated set if laws with limited resources. It can only audit about 2% of all returns. Where cash is not deposited in a bank account it is very difficult to detect. Indirect methods of determining income by measuring expenditures can detect unreported income, but the audit costs consume limited resources and it cannot get to everyone.