Tuesday, February 19, 2013

Catch me if you can....

In a post a while back I suggested it was likely that, due to the middle class being so squeezed, more and more people will start working for cash and not report their income, or at least not all of it, to the IRS.  More than a few of you commented my scenario was unlikely.  Consider this:

Here are some statistics from a German university study in 2006 showing the size of the "shadow economy" (% of the economy not reporting income/paying taxes) in a number of advanced western countries:

   Greece                 28%
   Italy                      25%
   Spain                    22%
   Portugal                21%
   Sweden                18%
   Germany              16%
   UK, Netherlands   12%
   US                          8%

(There are other more current studies, too, but this one was the easiest to pull numbers from.)

Closer to home let me share a few actual examples I have personal knowledge of:

Last year (2012) I was approached by a guy who owned a specialty grocery store about building him a house.  He wanted to pay me $200,000 in cash and then have the balance documented on a sales contract.  This would make it look like the house cost $200,000 less than it actually did.

I suspected he was skimming cash from his business and needed to burn it off, and/or he wanted to claim his house cost less than it actually did for property tax purposes.  I wanted nothing to do with him and declined.

Today his house is being built by another builder.  Is that builder working under the same terms I was offered?  If he is, is he going to report the $200,000 in cash he received?  I don't have answers to these questions, but the opportunity to cheat is certainly there.

I have a cousin who owns a masonry supply business.  He tells me he has numerous customers who do small brick and stone repairs for individuals on a cash basis only....$200-$300 at a time, several a day....and that's how they pay for their materials, too....in cash.  Do these small one-man operations pay taxes on any/all of this cash income?  I don't know, but I have my doubts.

I know a guy who has a residential window washing business, and he works on a cash basis only.  He quit his full-time career with benefits and made this part-time job his full-time business.  He's single and has no employees.  Whether he pays taxes on his cash income I don't know, but his lifestyle suggests he doesn't.  Regardless, the opportunity is there to cheat.

I have more examples, but I believe these are enough to prove my point.  I think more people than you might imagine would jump at the chance to screw the government out of some taxes if they could.  Look around and you can probably see similar examples where you are, too.

And these are just the small-time tax cheats.  The big boys don't pay their taxes....legally and with congress' blessing....by sending their money to low-tax/no-tax havens offshore.  I recently read in the Economist that these havens hold tens-of-TRILLIONS of dollars from all sources worldwide.

Why should you care?  Because what they don't pay, you do.  Sorta makes signing that tax check a bit more infuriating, doesn't it?



  1. This comment has been removed by a blog administrator.

  2. There's a lot of creative bookkeeping going on. Makes me feel like an idiot for reporting my paltry $550 in book sales.

  3. I pay my taxes gladly and feel patriotic when I do. After all, tax rates now are as low as they were when Truman was in office. I just wish Congress would close all of these loopholes and force corporations to pay their fair share.

  4. Many small busineses have two sets of books, and many cash transactions are not reported as income. In the consumers favor, this fact probably keeps prices a little lower.

    I say give the little guy a break, it is what makes small businesses attractive, kinda an unwritten but useful loophole. But where do you draw the line?

    Good post!

  5. I'm mostly with what Stephen said...but I do get mad there isn't a better way to catch all the cheaters.