Last week it was time for a haircut, so I made an appointment with my friend Tiffany, who has a salon in her south-side home.
Tiffany’s a competent woman in her 40s who has been cutting hair for 20 years. Making ends meet was tough when she had young children, so she worked construction, bartended and also cleaned houses.
The kids are grown and gone, but having multiple skills has served her well during the city’s long recession.
“I helped a plumber friend of mine install hot-water heaters in Cañon last week,” she said. “Cold, miserable work — and he hasn’t paid me yet. He told me he’s comin’ by tonight and he’d better have five hundred dollar bills in his hand or I’ll kick his fat butt!”
Haircut finished, I paid Tiffany in cash and left.
How many Tiffanys are there in the Pikes Peak region?
How many of us manage to bring in a little cash on the side, which we may or may not report on our income tax returns?
In “America’s Underground Economy,” economists Edgar Feige and Richard Cebula estimate that “18 to 19 percent of total reportable income is not properly reported to the IRS, giving rise to a tax gap approaching $500 billion.”
We tend to identify such figures with ruthless rich guys hiding millions in offshore tax havens, or with multinational companies who cleverly shift domestic tax liabilities to foreign subsidiaries.
We don’t think of men and women like Tiffany, doing difficult work, getting paid off the books, and barely keeping their lives together.
We don’t think of small businesses teetering on the brink, hamstrung by government regulation and unaffordable taxes.
“In a recent California survey of three hundred thousand contractors,” James Surowiecki reported in the New Yorker, “two-thirds said they had no direct employees, meaning that they did not need to pay workers-compensation insurance or payroll taxes. In other words, for lots of people, off-the-books work is the only job available.”
Feige estimates that Americans hold $750 billion in cold, hard, largely untraceable cash.
We may think we live in a cashless society, but cash is the lubricant that enables the underground economy to function.
Once Tiffany gets her $500 from the plumber, she’ll pay a friend $150 to fix her car, buy some groceries, a couple of six-packs, and a tank full of gas. She’ll style her friend’s hair for an eighth of weed, and tend bar at a neighborhood hangout for tips and few bucks from the till.
Working folks like Tiffany understand the nuances of the gray economy. In a different America, those in the middle class considered such petty wheeling and dealing beneath them, but the great recession has changed attitudes.
If jobs are temporary, benefits skimpy and taxes onerous, what are you supposed to do? And if you own a small business, how can you deal with cash-only, off-the-books competitors?
And if government regulations seem to penalize legitimate businesses and reward scofflaws, how can you survive?
Feige points out that the cash-only economy has migrated from illicit businesses and construction to other fields. Americans younger than 30 have no memory of a time of abundant jobs, steady earnings growth and the sure knowledge that good times would continue forever. Theirs is a floating, uncertain world, one where loyalty is unrewarded and hard work ignored. Working off the books compensates for low wages and difficult work environments.
A country of disillusioned business owners and disgruntled part-time workers is increasingly one friendly to tax evasion.
Participation in the gray economy, says Feige, is driven by three factors: the unemployment rate, the average effective federal income tax rate, and public dissatisfaction with government.
That’s an economist’s viewpoint, but it seems to me that the answer is a lot simpler.
For the tens of millions of people who only can find part-time work, or migrate from job to job, or who are unemployed for long stretches of time, taxes may be literally unaffordable.
You can’t very well be a functioning member of the workforce without a car, a cell phone, a computer with Internet access and a place to live — not to mention the daily necessities of life such as food, utility service, car insurance, gas, clothing and medicine.
Once you fall into poverty, it’s hard to recover.
If you’re not already there, you cross over into the gray economy — and once there, you stay.