Business: Take Cash and Skip the Tax

Latest dodges: barter, street hawking and “hiring a horse “

While the economy is dipping into a recession, a much noticed but little recorded sector of American business activity is thriving as never before. It is the underground economy, an illicit system of cash and barter in exchange for goods and services. Because it operates beyond the statistician’s reach and the tax collector’s grasp, no one knows its exact size and scope. But various learned economists, who find this fast-growing sector to be a fertile field for academic investigation, estimate that it runs to hundreds of billions of dollars a year.

Parts of the underground economy are highly visible. Most big cities are aswarm with street hawkers, who sell from boxes and truck tailgates an astonishing variety of jewelry, clothes, toiletries, fruits vegetables and assorted schlock. Some of the stuff is “hot”; last year about $2 billion in merchandise and food was hijacked from trucks or stolen from warehouses. The rest is distress merchandise that has not moved on the store shelves and is dumped at large discounts to middlemen, who field it out to street hawkers. City governments are trying to collect sales taxes from the vendors, but the vast majority pay nothing.

The biggest dodge in the underground economy is carried out by people who may pay tax on part of their income but demand the rest in unreported cash, usually in convenient large-denomination bills. One sign of this trend is the fast rise in the number of $100 bills in circulation —some 382 million today vs. 267 million only three years ago. In addition to his regular job as a mechanic, Mike does bodywork on damaged autos in San Francisco for cash on the cylinder head and pockets $100 to $200 a month in undeclared income. Bob, a Santa Cruz, Calif bartender, declares his $5 hourly wage but not his $100 weekly take in tips. “You don’t have to worry about getting caught,” he explains. “It’s your word against the IRS.”—Jerry, a Cincinnati lawyer, provides “free advice” to an employment agency for domestics. In exchange, the agency sends a maid every week to clean his apartment—gratis. Jerry “makes” $1,500 a year in unreported income on the deal.

Don, a Chicago social worker, pays only $90 for a $260-a-month apartment by filling in at night as the building custodian: he saves $2,040 a year and breaks federal law by not reporting it as income. Eddie, who pays taxes on his earnings as an apartment superintendent in New York City, clears an additional $250 a week in tax-free cash by driving a cab when the owner is not using it. “That’s better than making $350 or $400 on the books,” he boasts. The cab owner is equally pleased since he pays no taxes on the money that Eddie gives him to “hire the horse,” that is, use the taxi.

A young woman has begun to make a small fortune on Wall Street by selling municipal bonds to doctors and dentists. They pay in cash from earnings they have not reported to the Internal Revenue, and there is no record of the bond purchases because they are so-called bearer bonds and therefore do not carry the name of the owner. Gambling casinos are surging in part because they are convenient places to spend cash. Says Albert W. Merck, a member of New Jersey’s casino control commission: “A casino fills a fascinating function in an economy where there is a lot of unrecorded money. It is a place to put undeclared cash.”

The Feds are not the only losers. In states where sales taxes are high, avoidance schemes abound. The simplest ruse is the empty-box trick. The customer buys a big-tag item, such as an expensive suit or shoes and makes a deal with the merchant to “mail” it to an address in a state with a lower rate. The merchant obligingly sends an empty box, and the customer walks out with the goods. A variant is to send the purchase to a friend in another state. Rob, an accountant, saved $600 on a $12,000 painting by having the gallery mail it from Chicago, where the state sales tax is 5%, to a friend in Indiana. Rob collected the painting and paid no sales tax whatsoever.

Flea markets are flourishing partly because they seldom charge taxes. Barter clubs are also springing up fast, particularly in the West. The clubs offer swap deals on a vast array of goods and issue checks” for services. A gynecologist, for example, may cash his “check” with a mortician. The members of the clubs claim that their transactions do not represent sales and thus are not subject to taxes.

The surge of the underground economy reflects a troubling shift in American attitudes. So many people are fed up with inflation and high taxes that they no longer feel morally obligated to obey tax laws. Reports TIME Correspondent John Tompkins, who has covered organized crime for many years: “The underworld and the upperworld have converged in their morality over the past several decades. The underworld has not moved over to us, but we have moved in its direction.” The victims, of course, are the honest taxpayers, who will have to fork over more and more to carry the load of the connivers and chiselers who pay less and less.

* Not quite. All employees who earn more than $20 a month in tips are supposed to report their gratuities to their employers, who then are required to withhold an appropriate amount for taxes Furthermore, the employee is responsible for keeping accurate tip records. Otherwise, the IRS can estimate tip income and collect taxes on it.