The Meaning of the “Underground Economy” and the Full Compliance Deficit

  • Edgar L. Feige
Conference paper
Part of the Studies in Contemporary Economics book series (CONTEMPORARY, volume 15)

Abstract

A growing amount of professional attention is now directed toward the issue of the existence and implications of the “underground” or “shadow” economy. Unfortunately, the terms “underground” and “shadow” have been used to mean quite different things by different investigators, and these unresolved questions of definition introduce considerable confusion in the literature. Theoretical and empirical research require a finer set of conceptual distinctions to clarify both the differences and the interconnections among the variety of descriptive terms presently employed by “underground economists.” To this end, I wish to put forward a taxonomic framework which distinguishes among economic, fiscal, and social concepts of income. The first section of this paper elaborates these income concepts and establishes their interrelationships.

Keywords

Income Omic Plague 

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Footnotes

  1. 1).
    The author gratefully acknowledges research support from the ALFRED P. SLOAN Foundation.Google Scholar
  2. 2).
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  3. 3).
    SKOLKA, J. “The Prallel Economy in Austria”. Presented at the Bielefeld Conference on the Shadow Economy October, 1983.Google Scholar
  4. 4).
    SMITH, J.; MOYER, T. and TRZCINSKI, E. “The Measurement of Selected Income Flows in Informal Markets”. Prepared for the Internal Revenue Service, December, 1982.Google Scholar
  5. 5.
    A System of National Accounts and Supporting Tables, Studies in Methods No. 2, United Nations, New York 1953.Google Scholar
  6. 6).
    Recorded income can be measured with different degrees of “grossness,” thus giving rise to distinctions between GNP and NNP. Estimates of national income are derived from NNP by subtracting indirect tax and non-tax liabilities, business transfer payments, and the statistical discrepancy, and by adding subsidies less the current surplus of government enterprises. Finally, personal income is derived from national income by subtracting corporate profits with inventory valuation and capital consumption adjustments, net interest, contributions for social insurance, and wage accruals less disbursements, and by adding government transfer payments to persons, personal interest income, personal dividend income, and business transfer payments.Google Scholar
  7. 7).
    The Bureau of Economic Analysis makes imputations for food produced and consumed on farms and also includes imputations for non-monetary transactions such as rent for owner occupied housingGoogle Scholar
  8. 8).
    SIMON C. and WITTE A. “The Underground Economy” LSA Vol 7, No. 2. 1984 report estimates for drugs, gambling and prostitution for 1980. The Internal Revenue Service estimates illegal income from these sources to be $ 34.2 billion for 1981.Google Scholar
  9. 9).
    An example would be food grown and consumed on a farm which is excluded from fiscal income under U.S. tax law, but is considered to be a segment of total economic income for which NIPA imputations are undertaken.Google Scholar
  10. 10).
    Income Tax Compliance Research, Department of the Treasury, Internal Revenue Service. July 1983.Google Scholar
  11. 11).
    Personal Income represents one of the major components in the construction of the broader measure of economic activity, namely GNP. We focus our discussion on personal income, because it is to date, the only NIPA concept for which it is possible to derive a direct empirical relationship to empirical measures of fiscal income, eg. AGI.Google Scholar
  12. 12).
    See FEIGE, E. L. “A New Perspective on Macroeconomic Phenomena: The Theory and Measurement of the Unobserved Sector of the United States - Causes, Consequences and Implications.” Presented at the 1980 Meetings of the American Economics Association, and FEIGE, E.L. and McGEE, R.T. “Policy Illusion, Macroeconomic Instability and the Unobserved Economy”, in The Unobserved Economy, Cambridge University Press, 1985.Google Scholar
  13. 13).
    The IRS and BEA measures are reported in the Survey of Current Business, November 1981 and July 1982. The transactions method estimates of AGI are based on the relationship between adjusted total transactions and reported AGI. The transactions method is described in “A New Perspective on Macroeconomic Phenomena” ibidGoogle Scholar
  14. 14) “Estimates of Income Unreported on Individual Income Tax Returns” Internal Revenue Service: Publication 1104 September, 1979.Google Scholar
  15. 15) “Income Tax Compliance Research” Internal Revenue Service, July 1983.Google Scholar
  16. 16).
    Subcommittee on Oversight of the House Committee on Ways and Means, October 9, 1979.Google Scholar
  17. 17).
    PARKER, R.P. “Improved Adjustments for Misreporting of Tax Return Information Used to Estimate the National Income and Product Accounts, 1977”, Survey of Current Business June 1984.Google Scholar
  18. 18).
    Taxes and the Budget: A Program for Prosperity in a Free Economy Committee for Economic Development, New York 1947.Google Scholar
  19. 19).
    The High Employment Budget: New Estimates, 1955–80“ Survey of Current Business, November, 1980 and ”The High Employment Budget and Potential Output Survey of Current Business, November, 1982.Google Scholar
  20. 20).
    de LEEUW, F. and HOLLOWAY, T. “Measuring and Analyzing the Cyclically Adjusted Federal Budget”, Federal Reserve Bank of Boston Conference on the Economics of Large Government Deficits, October, 1983.Google Scholar
  21. 21).
    See de LEEUW and HOLLOWAY, ibid.Google Scholar
  22. 22).
    The introduction of inflation adjustments is discussed in EISNER R. and PIEPER P., “A New View of the Federal Debt and Budget Deficits” Mimeo, 1983.Google Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 1985

Authors and Affiliations

  • Edgar L. Feige
    • 1
  1. 1.University of WisconsinMadisonUSA

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