By Cris Sheridan | FinancialSense.com | Mar. 30, 2012
There are two major trends taking place that are shaping up as a recipe for disaster. On the one hand, we have massively indebted governments around the world desperate for tax revenues and, on the other, steadily growing multi-trillion underground economies whose main goal is to avoid paying them.
According to a recent study, the amount of uncollected tax revenues in the U.S. is estimated around a whopping 500 billion dollars per year1—enough money to bailout most of Europe.
At 8 percent of GDP, the underground or shadow economy in the U.S. is much smaller percentage-wise than other nations like Greece (25 percent), Italy (27 percent), or Thailand (70 percent)2, yet, given our overall size, America's untaxed economy is larger than “the official output of all but the upper crust of nations across the globe…bigger than the GDP of Turkey or Austria.”3
Question is: How long will the government allow this to last?
When times are good and the economy vibrant, there is less incentive to crack down on tax-evasion; but now, unemployment is at all-time highs, income and property taxes have fallen dramatically, and the government is supporting an increasingly large and record number of people through a wide range of benefits.
Desperate times call for desperate measures
In an interview with Jim Puplava titled “Never Underestimate the Desperation of a Broke(n) Government”, world renowned economist, Martin Armstrong, cites numerous examples of how the U.S. is following a well set historical pattern where, inevitably, the “government is going to be much more aggressive to tax people, chase them down, and put them in prison.”
Just recently, noted author and blogger, Charles Hugh Smith, cited how California—a case-study for high taxes, regulation, and smothering bureaucracy—automatically seized funds out of a previous resident’s bank account for not filing taxes in the year 2006—five years after he had long moved out of state. In response to this incident, Smith writes, “What is entirely believable is that the state of California, desperate for revenue, is churning out dubious income tax claims stretching back years and collecting the money without due process.”4
If true, and these types of aggressive acts are to become more common, it should be fairly obvious that they won't achieve the desired results. As taxes are raised, regulations and filing requirement made more stringent, more and more people will merely leave the system. Eventually, the government will have to think of a different way to collect.
We could change current tax laws and make it less burdensome but, when given a choice between simple or none, most people would rather choose none; and since many realize that by doing everything in cash their transactions are virtually untraceable, the risk of getting caught is quite tiny compared to the benefits of keeping much more of their income.
The only option left is to remove the very thing that fuels the underground economy in the first place.
Cash becomes illegal
Consider Italy Intensifies Its All-Out War on Tax Evaders
In addition to banning cash transactions, [Italy] has included an ad campaign comparing tax evaders to parasites. There have been headline-grabbing raids on stores, hotels and restaurants in affluent Italian cities. For good measure, tax officials have also been stopping luxury cars and asking drivers to show their licenses, then using the information to pull their most recent tax returns.
Recently, best-selling financial author and well-known investor, Doug Casey, offered his perspective on this issue by pointing out that “governments hate cash for lots of reasons…it costs a couple of cents to print a piece of paper currency, and they have to be replaced quite often. As the US has destroyed the value of the dollar, they’ve had to take the copper out of pennies, and soon they’ll take the nickel out of nickels. Furthermore, with modern technology, counterfeiters—including unfriendly foreign governments—can turn out US currency that’s almost indistinguishable from the real thing. And the stuff takes up a lot of space if it’s enough to be of value. So sure, governments would like to get rid of tangible currency. They’d like to see all money kept in banks.”5
Italy or Sweden?
Aside from how governments personally feel about cash, some societies are choosing to abandon it voluntarily. As recently reported by the Associated Press, cash only represents 3% of Sweden's entire economy—a trend that isn't being enforced through law but rather embraced by a strongly technological and innovation-loving people.6 No "headline-grabbing raids", automatic seizure of bank funds, or stopping luxury car owners to check their most recent tax returns. Then again, Sweden is also known for having the highest tax rates in the world.
Although the total amount of money changing hands in America's shadow economy is quite massive, again, with respective to our total economy it is fairly small—about 8 percent of GDP. Given the sheer convenience and accessibility of electronic payment options almost everywhere you go, the transition towards a cashless society is certainly "in the cards."
However, given the diversity of America's population, our strong desire for privacy and longstanding hatred towards taxes, there will always be a strong demand for some form of cash or non-traceable currencies—something I doubt the U.S. government won't try to supervise or restrict.
Resistance is futile. You will be assimilated
Given the trends taking place, a hot or cold war against non-traceable decentralized forms of currency is almost inevitable. Like Italy, the U.S. could hit such transactions head on and declare them illegal—although not without a massive uproar. On the other hand, the government could take a more indirect and technological approach that forces compliance overtime.
Specifically, we should expect to see some form of the following if the U.S. made a goal of collecting the estimated $500 billion in potential tax revenues:
- Make cash transactions illegal
- Merge all your information into one account and flag for any discrepancies between income and expenditures
- Make it impossible to receive any form of government-provided or government-regulated assistance (Social Security, Medicare, health insurance, bank loans, credit, etc.) unless all taxes are current and accounted for
Obviously, if cash transactions were made illegal it would be very hard for anyone operating outside the system to freely exchange goods and services within the wider economy. However, it’s very easy to transfer cash balances onto a stored value card and then use that instead. Also, people could start using gold, silver, Bitcoins, or any other form of decentralized payment methods within various sub-networks.
For the second option—merging all your information into a database—this would further help in cutting down uncollected revenues but would also require voluntary participation by most non-regulated providers of goods and services. You would also expect to see a large number of costly and intrusive audits for those operating businesses on a cash-basis.
The last option—slowly making it impossible to receive aid, loans, insurance—would effectively strangle the shadow economy into submission and mitigate the chances of a revolution by declaring war on decentralized methods of payment. Incidentally, I believe a very eye-opening glimpse of what's truly in the works was revealed when the Social Security Administration released a report highlighting the Big Brother right-to-access approach in conjunction with various other government agencies.
Consider SSA seen going 90 percent electronic
The Social Security Administration has little choice but to move toward a goal of processing 90 percent of all transactions electronically in the coming decades, according to a new report adopted by an SSA advisory panel...
The “Re-imagining Social Security” report was published recently on the panel’s website after being adopted by the group at a meeting in May.
In practical terms, the full picture of SSA's electronic processing would mean that hospitals would create an electronic medical record for each birth and communicate data about those births to SSA, which would set up a password-protected electronic account for each child.
Thereafter, as adults, people could log into their personal SSA account to verify information for jobs, name changes, widowhood, disability and retirement. Furthermore, SSA would communicate electronically with Medicare and with private doctors and hospitals to obtain patients' medical information if needed for a disability or benefits claim.
The proposed birth-to-death electronic system described in the report does not exist. The envisioned medical data-sharing network is based on the Health and Human Services Department’s Nationwide Health Information Network, and the job-verification system is based on the Homeland Security Department’s E-Verify, neither of which is widely used [currently]. More spending would be needed to create the necessary systems and networks, the report states...
To serve the small percentage of people with complex transactions or those who are unable or prefer not to use newer technologies, SSA should look into creating joint service centers with other federal agencies, such as the Internal Revenue Service, the report states.
There you have it: the merging of all your information (and money?) into one easily accessible electronic file. Want to get Social Security or other benefits? Apply for a loan? Get health insurance? You’re going to have to be part of the system. Otherwise, except to hear from the IRS!
 America's Underground Economy: Measuring the Size, Growth, and Determinants of Income Tax Evasion in the U.S.
 Hiding in the Shadows: The Growth of the Underground Economy
 America’s ‘shadow economy’ is bigger than you think – and growing
 Welcome to the Predatory State of California—Even If You Don't Live There
 Doug Casey on Cashless Societies
 In Sweden, Cash Is King No More