Of course, even if this is true, it doesn't necessarily mean that the underground economy is growing here. U.S. currency is the medium of exchange of choice for underground activity worldwide. Indeed, 45 percent of U.S. currency circulates outside the United States for this reason. According to the Commerce Department, the United States "exported" $16.6 billion in currency last year, almost all of it in the form of $100 bills.
The former chief economist for the International Monetary Fund notes that the European currency, the euro, is now competing for the underground economy's business by having 500 euro notes, worth more than five times the U.S. $100, the largest bill printed by the Treasury in more than 50 years. He notes that $1 million in $100s would fit in a briefcase, but $1 million worth of 500 euro notes would fit in a purse -- a big advantage in the underground world.
The underground economy results from many factors, including criminal activity. But the bulk of it arises from ordinary businessmen and workers who are evading taxes and government regulations. The OECD downplays the importance of taxes and puts most of the responsibility on regulation. However, other studies have found that high tax rates are the most important factor in stimulating growth of the underground economy.
"In various surveys, the tax burden has always been identified as the main cause for the growth of the shadow economy," according to Schneider and Enste. Their analysis found that a 10 percentage point increase in the tax burden would cause the underground economy to rise by 3 percent of GDP. A Federal Reserve study found an even higher response, with an increase in the tax rate from 9.3 percent to 10 percent leading to a 1.5 percent rise in underground output.
A recent IMF study found that the composition of taxation was very important. High taxes on small businesses and the self-employed were most likely to lead to underground economic activity. "Raising tax rates too high drives firms into the underground economy," the study concluded.
One indication that taxes are stimulating tax evasion here is that the amount of income reported on tax returns has fallen compared to the amount of income paid as calculated by the Commerce Department. This income gap tends to rise and fall with the tax burden.
Whether caused by taxes or regulations, it is clear that government is the prime cause of the underground economy.