Tuesday, April 8, 2008

Bay State targets underground economy

Ever-tightening business regulations and rising taxes inevitably drive a growing share of economic activity beyond the easy reach of regulators and tax collectors. People desiring to hold on to a larger share of their income than allowed by law, or fearful that rules and regulations make business activity next to impossible, are forced to look to operating in the shadows as a reasonable alternative to being bled dry or ceasing operation entirely. So, in this age of heavy regulation as well as a slowing economy, expect to see more stories like this one from Massachusetts:

Businesses who operate under-the-table and employers who break employment laws will be the focus of a task force Gov. Deval Patrick is poised to create on Wednesday.

Patrick plans to sign an executive order establish a Joint Force on the Underground Economy and Employment Misclassification, according to a State House source briefed on the announcement.

Advocates for tightening penalties against businesses engaging in illegal activities say so-called underground economy businesses drain the state’s economy through fraudulent practices.

Mark Erlich, executive secretary treasurer of the New England Regional Council of Carpenters, called the measure “long, long, overdue.”

“State budgets are tight. Here is an opportunity to raise revenues without raising taxes,” said Erlich.

A 2004 report (PDF) produced by Harvard University scholars found that simply "misclassifying" workers as independent contractors rather than employees allowed those workers to keep $152 million out of the hands of the state government. Plenty more money escapes the state coffers through other clever dodges -- or simply through the practice of operating businesses beneath the government's radar.

Nationally, the underground economy is estimated (PDF) as equivalent to 8.4% of GDP -- just about the smallest in the world. A heavily regulated and taxed jurisdiction like Massachusetts almost certainly has an underground economy closer to European proportions, ranging anywhere from Switzerland's 9.4% of GDP to Greece's 28.2% of GDP.

I'm sure the heads of the European Union wish Governor Patrick better luck than they've enjoyed so far.

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