10 Sep 2013

What is The True Cost of The Shadow Economy in The US – Infographic

A tough economy is usually bad news for everyone. The last five years have witnessed an incredible sag in the vitality of the global market, and countless efforts have been made to try and get things back on track so that people can go back to work and businesses can once more see profits.

But hidden amongst the folds of the multilayered international crisis lies a more obscure but equally significant aspect of the global economy—the so-called “shadow economy.”

The “shadow economy” refers to all transactions that occur “under the table,” transactions that are not declared for tax purposes and therefore take place purely in the form of cash transactions. Much of this economy deals with illicit products—the drug trade for example—but other cash exchanges take place for legal items that are not declared for various reasons, the most common being that people do not want to have to pay taxes on their earnings.

As you can see in the accompanying infograph, the shadow economy differs in size depending on which countries you’re talking about. The various tax policies in countries across the globe account for the fluctuations in size of that country’s shadow economy—countries with high federal taxes will naturally have a larger portion of their transactions take place under the surface to avoid the extra financial burden.

You may be asking how, exactly, we measure the shadow economy if these earnings are not reported. It’s a very good question. Unreported economic activity is estimated by the consumption of electricity. It’s assumed that shadow market activity requires an equal amount of energy as normal economic activity, so the difference between household electrical consumption and GDP is considered to be attributable to the shadow economy’s operations.

So as you can see, the ability for humans to interact financially and exchange goods for services is not strictly limited by the functioning of the global market. Obviously, a large shadow economy is bad news for a country, as it means lower revenue for the government and the potential for higher illicit activity—perhaps this is the reason why it is so often glossed over in discussions of the global market. But understanding its presence and import is crucial to understanding the full picture of the world’s economy.

 

An infographic about the true cost of the shadow economy in the US and whether it would be enough to cover the US budget deficit(spoiler alert: it's not).

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