Underground Economy sample essay
Every year, economics becomes a hot-button issue for politicians and ordinary citizens across the country. Politicians stake their careers on promises of economic revitalization, and individuals grouse when the forecast for the national economy is less than inspiring. Most economists measure an economy’s health by a variety of factors, such as the Gross Domestic Product, tax returns, poverty rates, and unemployment rates (Koopmans 575). But how accurate are these numbers? And if they are not accurate, then is society receiving a truthful picture of the overall economy?
Many scholars stimate that as much as twenty percent of the GDP goes unreported every year (Kacapyr 30-31). In addition, surveys confirm that up to 25 million Americans are leaving large portions of income out of their tax files (Bartlett, “Going Underground”). In fact, the IRS estimates that an astounding one trillion dollars of income is left out of tax documents every year (Speer 15). Many factors contribute to this disturbing trend, such as crime and questionable business practices.
However, one hot-button issue in particular has emerged as a significant factor in underground economy activity. For Texans, illegal mmigration is a little-disputed reality. For the American economy, Texas is an undeniable omen of the devastating impact of the underground economy. The term bears many other names (including informal and shadow economy), and has been defined in numerous ways, including “those economic activities that circumvent or evade . . . the tax code” and “unmeasured economic activity” (Priest 2259). The last definition, in its simplicity, best defines the underground economy.
When many people think of unreported earnings, they may picture traditional illegal activities such as drug smuggling, prostitution, and gambling. While such activities do comprise a large part of the underground economy, millions of ordinary and otherwise law-abiding citizens participate in the underground economy every day. A 1994 auditor’s report states that, “The underground economy is not all smugglers. It is hundreds of thousands of otherwise honest people who have withdrawn their consent to be governed, who have lost faith in government” (Dawson 18).
For example, general laborers who are paid ‘under the table’ are for the most part honest individuals that nevertheless make up the estimated ? of Americans who earn “unofficial income” each year (Bartlett, “Going Underground”). What are the reasons for this illicit activity, and what effect does the underground economy exert on the overall economy? One major aid to the underground economy according to most experts is tax laws. Supply-side economics holds that any changes in marginal tax rates will have an important effect on resource use (Gwartney and Stroup 114).
In other words, the presence of taxes greatly impact the economic decisions of businesses and employers alike. A big benefit for underground employees is the absence of income tax and social security reductions. In the underground economy, gross income and net income are equal. Employers also avoid costly payroll taxes when they engage in underground activities (Sennholz, “The Underground Economy”). Data gathered from the Census Bureau seems to confirm the prominence of tax evasion. The group estimates a twenty-five percent non-response rate for questions relating to income (Speer 15-16).
Further, a Federal Reserve study found that when the tax burden increased by ten percent, underground activity rose by up to three percent. Self-employment and small business tax rises are particularly linked to underground economic expansion (“Underground Dwellers,” National Review). Another important determinant of underground participation is unemployment. Numerous studies have found a positive correlation between unemployment and underground participation. Individuals (especially those supporting families) who cannot find a well-paying job often feel that they have no other choice but to work in whatever job becomes available.
Such citizens may work underground while still accumulating welfare and unemployment checks (Bajada 281-284). Surveys of inner-cities suggest that a gap does exist between the income reported to social welfare agencies (an average of $10,000/year in one California study) and the “actual” income level disclosed in confidential questionnaires (an average rise of $5,000/year in the California study). (Speer 16) Illegal aliens represent one prominent group who benefit from underground activities.
Immigrants from poorer countries such as Mexico can be illegally paid under the minimum wage and still accumulate earnings significantly higher than if they found work in their home country. Such arrangements benefit both the employees and the employer (who avoids paying minimum wage and benefits) financially (Schlosberg 45- 47). The ramifications of underground economies on the economic picture are enormous. As previously mentioned, statistical data used to calculate the health of an economy can become irreparably skewed by missing underground information.
Poverty rates and unemployment rates are overestimated (Bajada 181), which can present an overly bleak forecast for a state’s or country’s future (as evidenced by the American Demographics Index of Well-Being) (Kacapyr 31). In addition, small businesses and firms lose income opportunities because they are reluctant to move businesses into areas hich are deemed (perhaps falsely) as “poor” (Speer 16), resulting in a loss of revenue for affected regions. In return, the lack of legitimate businesses only stimulates the underground economy.
National and state savings rates are also underestimated, which may lead to faulty focus in social welfare programs (Justice and Ng, “The Underground Labor Force is Rising”). Since these anti-poverty programs make up more than 70% of public aid programs (Paglin 2254), then it is vitally important that the facts and figures which are used to support and implement such programs are as accurate as possible. The programs that do work will lose important funding, due to tax shortfalls (Anderberg, Balestrino, and Galmarini 651).
Likewise, the increased burden on taxpayers can create lower morale amongst even more otherwise law- abiding individuals (Bajada 187). For example, when the federal government is forced to raise taxes in order to fulfill missing income taxes, more citizens will become involved in underground activities in order to replenish their own incomes (Gwartney and Stroup 115-116). And the cycle continues. In the world of economics, there are no easy answers. Texas has learned this hard esson first-hand as its own underground economy thrives, largely due to a booming population of illegal immigrants.
According to estimates by the Pew Hispanic Center, Texas-based illegal immigrants account for roughly ten percent (1. 6 million out of 11 million) of the overall United States illegal citizen population. Most of these undocumented citizens have settled in seven populous regions, including Houston (Combs, “Undocumented Immigrants in Texas”). Researchers project that the population of Texas will comprise of over fifty percent Hispanics by the year 2030 (Johnson, “Texas 2025). Of these fifty percent, a majority will enter the growing workforce of undocumented workers.
Many of these undocumented workers arrive from the most education- and poverty-stricken regions of Central America and Mexico (Johnson, “Texas 2025”). Therefore, most illegal citizens, desperate for secrecy and any money for their disadvantaged families, accept jobs for little income and virtually no benefits. Despite a 1980s state mandate that banned companies from employing undocumented workers (“The Costs of Illegal Immigration to Texans” 7), Texas continues to be a prolific workplace for illegal immigrants.
In addition to its proximity to the Mexican border, the heavy tourism and farming present in the state makes the region an attractive draw for the surplus of service, construction, and field jobs that constitute most undocumented employment. What are the ultimate effects of Texas’ booming undocumented, underground economy? Since the state does not focus on income taxes, most tax losses result from the disadvantaged economic situation most illegal immigrants encounter. Less income itself means less spending and therefore less sales tax—taxes which generate a large portion of state revenues (Bartlett 12).
The greatest costs to the state economy, however, are accrued in public assistance. Just as state laws sought to punish employers for hiring illegal immigrants, the United States Supreme Court struck a blow to Texas’ immigrant control efforts by ruling that children of undocumented citizens must be allowed entrance into the public education system. Since this 1982 ruling, the state has spent roughly $7085 dollars per year on each student (including each undocumented student).
If reports by the Texas Education Agency are accurate, the annual cost of schooling undocumented students is 957 million dollars (Combs, “Undocumented Immigrants in Texas”), nearly one billion dollars per year. Healthcare represents another crucial cost of the underground economy. Since virtually all undocumented workers receive no health insurance, these individuals must rely on public health services when they do fall ill or get into accidents. In Texas, most of these services are readily available to anyone—regardless of citizenship status—due to the Indigent Healthcare and Treatment Act.
Emergency care, treatment of infectious diseases, immunizations, women’s and children’s health services, and even mental and substance abuse programs can all be obtained by illegal immigrants. The Texas comptroller conducted a comprehensive study at the end of 2006 which highlighted the extreme cost of such services per year. By applying a formula which measured state expenditures against the estimated undocumented population, the comptroller found costs of three and a half million dollars annually in emergency medicine alone.
Federally mandated assistance services such as Medicaid netted an additional 38 million dollar cost per year in relation to illegal immigrants. Overall, the comptroller put total healthcare costs based on underground activity at a conservative 58 million dollars. Most of these expenses fall onto local governments and businesses in the private sector, as does the estimated 130 million dollars in annual illegal immigrant incarcerations every year (Combs, “Undocumented Immigrants in Texas”). The impact of illegal immigration on small business entrepreneurs perhaps highlights the most lasting cost to Texas’ future.
A prevalence of underground economic activity steals from and slowly strangles the economy that is ‘above the ground. ’ Consider the plight of one contractor, a man who already charges at rates drastically reduced from those of his competitors. Despite his willingness to adjust to the economic climate and the spirit of capitalism, this legal worker—who compensates all of his employees fully—recently received a dismissal from a potential client that has become all too common: “I have two other bids here that are half what you’re asking” (McHugh, “Notes from the Underground Economy”).
Documented workers, already struggling in a struggling economy, must face even more obstacles simply because they expect a living wage. The government has done little to address this problem. By the turn of the century, fewer than 1000 employers nationwide were being held accountable for hiring illegal immigrants. If this lax approach to the problem continues, in the United States and in Texas in particular, the dire prediction of Texas State Representative Pete Gallego will transform into a grim reality: “By the year 2025, if we keep doing what we’re doing now, Texas will have the economy of a Third World country. ”
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