Tracking the Underground Economy

September 5, 2013


A peculiar statistic has been puzzling economists ever since the economy began its recovery. Retail sales have climbed steadily over the last four years despite the fact that gains in reported income have stalled. So if people still aren’t getting paid more, where is this disposable cash flow coming from? According to some, one need not look further than the underground economy.

Then again, the sum total of unreported U.S. income isn’t a thing you can easily track on a graph. All untaxed cash transactions are considered part of the underground economy, including everything from drug deals to yard sales. Although a definite amount is impossible to determine, most economists value America’s shadow economy at $2 trillion annually. That accounts for as much as 19 percent of total income, resulting in a yearly tax gap that tops out at $500 billion. Experts fear that disparity will only grow larger as more and more people become dependent on under-the-table transactions to supplement their earnings.

Kevin Kalmes, for instance, was out of work for two years when she received a foreclosure notice on her home. She began to sell items from her basement to raise cash and eventually made enough money to save the house. Rather than shutter her ad-hoc second-hand shop, though, Kalmes kept her rummage sale going full-time without permits. Kalmes’ story represents just one among thousands in which people had to devise their own ways to make money legally in this still shaky economy. Over the long term experts hope that the current stimulus driven by untaxed cash and enjoyed by retailers will lead to job creation. Ideally, that would mean fewer people would have to toil in the shadow economy in order to make their living. Still, there’s a chance that companies could remain reluctant to hire, driving even more people to seek out cash through tax-free means. If this turns out to be the case, then the U.S. government may stand to lose an increasing share of vital tax revenue.



  1. Is there any chance the underground economy will cease to exist?
  1. Could tax incentives encourage employers to hire more workers?


Source: Joshua Zumbrun, More Americans Work in the Underground Economy,” Bloomberg BusinessWeek, March 28, 2013. Photo by Russell Reno.