Sunday, July 24, 2016

Trying to tax the shadow economy

The US 'shadow economy' (where payments are in cash or in kind, and nothing ever gets officially reported, much less taxed) was estimated in 2012 to be as high as $2 trillion per year.  The IRS reckoned that unreported turnover and income cost it $500 billion in lost taxes.  Heaven knows how high the figures are today - but I doubt they're any lower.

All over the world, the 'shadow economy' is booming even as the 'official economy' is stagnating.  People who are shut out of the regular system are turning to the irregular alternative to survive.  A lot of it involves crime, of course;  but a very large proportion is probably the exchange of goods and services, working for cash under the table, and so on.  It's not surprising that the tax authorities in every country are trying to get a handle on the shadow economy in order to get what they see as rightfully theirs.

Australia's situation is probably a microcosm of what the authorities are trying to do all over the world.  It's certainly instructional.  The Sydney Morning Herald reports:

The Tax Office is targeting the growing number of people making a living or supplementing their regular income from the sharing economy.

"We have a team of data doctors developing the sophisticated tax return analysis we do," says Tax Office assistant tax commissioner Graham Whyte.

"They have PhDs in machine learning, data mining and predictive analytics," he says.

The models scrutinise returns for missing income, over-claimed deductions and also identity crime.

"The models learn and are not based on thresholds so that you can't second guess the models or try and beat them," Whyte says.
Income from working as a taxi driver for UberX or renting out a room on Airbnb should be declared, he says.

Usually the sharing economy "employers" do not pay income tax to the Tax Office on behalf of their "contractors". They therefore do not provide drivers with PAYG payment summaries.

Such income is easy for the Tax Office to track, at least in theory, as most payments in the sharing economy are electronic.

. . .

For the first time, the Tax Office is checking self lodgers' deductions as they complete their tax returns online in real time.

"If your claims are substantially higher than others in similar occupations, earning similar amounts of income, a message will appear, asking you to check them," Whyte says.

The online forms are automatically populated with interest income from bank accounts, for example.

There's more at the link.

I'm sure that Uber and Lyft drivers, and Airbnb landlords, are going to be targeted in the same way in this country.  I'm also aware of efforts to get illegal aliens to talk about their employers, some being offered leniency and even (depending on the importance of their information) immunity from deportation, provided they agree to testify against those paying them in cash and not paying tax on that income, or not paying other statutory requirements such as Workers Compensation premiums, etc.

I think we'll see growing efforts to tax payments in kind as well.  Technically, if you service my car in return for me fixing your plumbing, we're both supposed to report the services we receive 'free' as income equivalent, and pay income tax on them;  also sales tax, as if we'd bought them from a contractor and paid in cash.  However, very few people do.  I don't know how the authorities are going to crack down on it, but I daresay some sort of automated expert system such as they're developing in Australia will be part of it.

Worth keeping in mind by those who are looking to supplement their incomes, or make their scarce dollars stretch just a little further.



Joe Mama said...

Peter: A well thought out and well written essay.

One "theory of taxation" is that taxes are "rent" paid for the use of money. Under that theory, swapping services (which use no money) should not be taxed. It should come as no surprise that more people are opting out of using electronic money as the degree of debasement becomes more evident.

And, as a practical matter, if I do not have sufficient liquidity in the official currency to pay my taxes, will the IRS let me pay my debt by replumbing the White House? Not likely.

In fact, the fixed costs of the government have become top-heavy. We are close to the "eat the seed corn" stage where the entitlements promised the 11th assistant to the California Snail Darter commissioner trumps hungry kids in fly-over country.

SiGraybeard said...

And hence the drive to eliminate the hundred dollar bill proposed by former Treasury secretary Larry Summers. Somehow I'm certain that won't be the stopping point.

lpdbw said...

I think you're wrong about illegal aliens being rewarded for turning in their employers.

Illegal aliens are a protected class to the Obama regime. They don't want to do anything that might reduce their numbers, including inconveniencing their employers.

The only exception to that, of course, is if the employers are noteworthy Republicans.

parascribe said...

Elimination of the lost revenue to the shadow economy is one of the big selling points of the fair tax plan. The flipside is, the government gives up the power of the IRS. I don't see government addressing this issue in any way that doesn't involve heavy handed crackdowns.

J Melcher said...

P!umbing for autowork trades will be relatively rare. Frequently made exchanges are between women: I watch kids on your late shift if you watch mine in the mornings. Can be upscale: I will tutor your homeschoolers for algebra if you teach mine Spanish.

In my opinion one factor in the political proposal for "universal pre-k" -- fulltime school for four year olds -- is the advantage of destroying small day care businesses run by more or less ordinary people with split political preferences, in order to create a cohort of unionized public school employees who vote an bloc. But I digress.

Anyhow I mean to suggest the value of "mom like" services are unmeasured but vulnerable.

Rolf said...

How will they deal with it? They'll send you a bill, and you pay it or spend five times as much fighting it. AKA, "extortion."

J Melcher - and if you had to pay taxes on all "family duties," nobody has enough income, which means you need more taxes, more subsidies, more regulation, more bureaucrats, etc. from a statist perspective, it's a total win.

Anonymous said...

I am surprised that no one has mentioned the solution to this problem: eliminate the income tax and replace it with a national sales tax. The answer to all objections as well as the tremendous benefits of doing so can be found at
Please do not be part of the problem by telling us that it is impossible and will never happen. Anything that enough people get behind will happen.

Anonymous said...

Anon - but how do we get rid of the income tax? The VAT in Europe and Britain was supposed to end a lot of other taxes. Instead they now have a 20% VAT* in addition to the other taxes. How do you eliminate and forever block the income, property, inheritance, corporate, and other taxes first? That's the seemingly insurmountable problem.

*The VAT was not supposed to be this high. It is now, with some countries going even higher.


Will said...

Property tax should not exist. You don't own your property otherwise. You merely have a long term lease on it, and the .gov can take it away if you have a few years of low income.