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The Underground Economy

One reaction to inflation and high taxation is the growth of the so-called underground economy, variously at up to $500 billion a year the United States [MacAvoy, 1982]. In every industrialized country, including the Soviet 'Union [Horoszowski, 1980; Simis, 1981] much of the economic activity is unreported and thus escapes government regulation and taxation. In Italy, for instance, it js..;stimated that 70 percent of government loyees hold second jobs on which thry 'Pay no income taxes . .~: Typical forms -of underground economy include self-employed workers, ranging 'from cleaning women to professionals, who take al1 or part payment .in cash with no bills, no checks, 'no records; independent business operators who operate part of th-eir business on a basis of "strictly cash, no records"; .'I,moonlighting" workerswhose second job is reported neither by them nor by their employers, saving money for both; barter arrangements in which workers trade services with no money exchanged, as' when the mechanic services, the physician's car in return for medical services. Barter clubs arrange for exchange of unpaid services, including indirect exchanges, as when a member gives services to A and gets credit points in the "bank" with to pay for {re' services from B. Such barter clubs are held illegal by the Internal Revenue Service but still operate. The higher the tax rates and the more burdensome the government regulations, the greater are the temptations of tax evasion and underground activity ["Tax Dodging-It's a Worldwide Phenomenon,",U.S. & World Report, 92:37·-38, March 8, 1982.1

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