Money and Markets: Essays in Honor of Leland B. Yeager

The legacy of Bismarck 245people working. They are a standing incentive for the development of the blackeconomy. You have someone who at the age of 64 is earning, say, $10 an hour. Heis told that there is a tax by the Social Security Administration falling directly onhim and another similar tax on his employer, which is, in fact, deducted from hispay so that for his standpoint the real compensation is considerably less than thecost to his employer.If he continues working and neither he nor his employer reports that fact, he willbegin to draw his pension, and his employer could afford to pay him a higher wagewithout suffering any difficulties. Indeed the employer probably could convincehim that paying his previous salary without deducting the tax he was still pocketingthe same amount of money.Of course older people do sometimes feel that they would like to reduce theamount of work they do and hence some arrangement under which he was paid lessand had less work would probably be attractive. All this offers a strong incentive forhim to shift to the black economy and an incentive for his employer to assist him indoing so. Both save on tax money. If he shifts to the black economy not only will hesave on tax money, but he will continue to draw his pension, and hence will beconsiderably better off than he was when he was still part of the legal economy. Hisemployer, of course, also gains.This transaction must be concealed from the government, but that would seemto be fairly easy. If he were an employee of a large factory which has an elaborateset of books, concealing his continued employment would be difficult. If, however,he is in trades or an employee in a retail establishment, he can be simply paid out ofthe cash register. His employer’s accountant may notice this transaction, butthere’s no reason that he must inform the government. Thus there is a strongmotive for going black. This would also be true if the employee was employed in alarge factory where the government would get a record of his wage. This wouldoffer a strong motive for learning the necessary, very modest skills, to take upclerking in a retail establishment.Now I’m not claiming that I can prove the sharp increase of the black economyat the same time as taxes in general, including both income and Social Securitytaxes, went up. Indeed, granted the fact that statistics on the black economy arevery poor in spite of hard work by a number of good economists, such proof isimpossible. Suspicion, however, seems very reasonable.Note here that we don’t have any good reason for being opposed to the blackeconomy per se. It does reduce total tax collections, but to some extent it counterbalancesthat by producing things which add to the national economy. This isparticularly true if the black economy is staffed by people who if the governmentpolicy were accurately carried out would be unemployed and living on a governmentpension. Thus what I have said so far is not in any sense a criticism of theSocial Security system. It simply indicates that it behaves in a somewhat differentway than what the standard textbook says. I think one could make a good argumentthat this is an advantage which we should not criticize. Not only is each individualemployee or employer better off as a result of this violation of the rules of thesystem, but GNP is higher also. In a way the tax system makes people save money