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THE WELFARE COST OF THE UNDERGROUND ECONOMY
Author(s) -
ALM JAMES
Publication year - 1985
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1985.tb01763.x
Subject(s) - economics , welfare , incentive , deadweight loss , general equilibrium theory , microeconomics , market economy
This paper estimates the welfare cost of taxes that create an incentive for resources to flow to the underground, or untaxed, sector in the United States. Using a general equilibrium model of the American economy, the welfare cost is found to be large and growing in absolute and relative terms over time. In 1980 the welfare cost may be as much as $220 billion, or over 9 percent of output; even conservative estimates place the loss at nearly $100 billion. It also is found that small reductions in tax rates substantially reduce the welfare cost.