It’s tax season …
… and the elephant in the room is the underground economy
The Underground Economy (UE) is alive and well and richer than you think.
This privileged economy operates not so far underground, every minute of every day in every part of Canada and beyond. And it does so without the burden of taxation. The UE is a tax-free economy, creating jobs, competing for labour, and buying goods and services at great advantage over those who pay taxes.
We know it’s out there. We just don’t know how big it is. Actually, nobody knows. Our governments don’t know, economists don’t know and statisticians don’t know. All we have are their estimates, their educated opinions and a lot of the academic gobbledegook about something that can’t be measured.
The rocket fuel of the UE is cold, hard cash – something experts predicted would disappear by now in the plastic digital economy. But the rumours of its death are greatly exaggerated. In fact, cash is the global dynamo of illegal transactions in any currency. It is the tool of persuasion for striking a deal outside of the legal economy. “Will you take cash?” seals millions of deals every day. Nothing more needs to be said.
Four sectors in the legal economy account for most underground activity: residential construction, retail trade, food services and accommodation. Add to these the entertainment industry, and the huge swath of immeasurable criminal and black market activity. StatsCan underestimates the actual numbers in all of these areas, leaving us to deal with the phantom effects of the UE all around us everyday.
Behaviours range from the restaurant owner who fails to register meal transactions to the servers who don’t declare tips, to the self-employed worker who doesn’t report parts of his or her income. Taken collectively, these amount to billions of unreported dollars and lost tax revenues to all levels of government.
Thus, government services remain underfunded: pensions, healthcare, aboriginal entitlements, provincial equalization, municipal services, to name but a few. If the UE is 10 per cent of Canada’s GDP of $1.6 trillion it consumes an amount equal to the entire economy of Nova Scotia every year. But the Bank of Canada believes it’s as high as 19 per cent – an amount greater than the economies of most medium-sized countries in the world.
Taxes are not the only victims of UE. Think of social security contributions, minimum wage and maximum working hours. Then there are the permits and accreditations that are ignored when people work outside of the tax realm. Builders lie about their credentials and underpay their workers in cash.
The Internet is adding new players to the UE, with barter sites and commercial sites, such as eBay and Kijjji, operating under the visibility of the taxman.
Then there are the millions in offshore dealings and tax shelter schemes, involving Canadians who were disclosed by the media as part of an elaborate cover-up by KPMG, the accounting firm that conceived of the tax avoidance strategy in the first place.
The Canada Revenue Agency (CRA) handled it poorly, granting an “amnesty” to those who actually broke the law in glaring contrast to how people who avoid taxes are treated by CRA within the country. When the rule of law is violated in particular circumstances for whatever reasons, the credibility of the entire tax system is jeopardized. We are all the net/net losers.
When our governments lose revenues because of the UE, the taxes from the legal economy have to pay for all of the services we expect. So bear in mind this tax season that we are all paying more taxes to make up for the shortfall that the UE inflicts on the legal economy.
“Behaviours range from the restaurant owner who fails to register meal transactions to the servers who don’t declare tips, to the self-employed worker who doesn’t report parts of his or her income.”
AUTHOR’S NOTE: This column is an abbreviated presentation of an article I wrote for Canada’s Chartered Professional Accountants (CPA) magazine published in it December 2016, with the editor’s permission.