Wednesday, January 18, 2012

Over $400 Billion in Taxes Lost in Unreported Cash Income

The following abstract is from a research paper on the unreported US economy.  The full text can be purchased at the URL provided below.  The interesting take-away here is that the whereabouts of as much as 85% of US currency stock is unknown and that the tax gap from unreported cash income is in the range of $400 to $540 Billion.  

DOI: 10.1007/s10611-011-9348-8


New estimates of U.S. currency abroad, the domestic money supply and the unreported economy

Despite financial innovations that have created important new substitutes for cash usage, per capita holdings of U.S. currency amount to $2,950.  Yet American households and business’s admit to holding only 15% of the currency stock, leaving the whereabouts of 85% of it unknown.  Some fraction of this unaccounted for currency is held abroad (the dollarization hypothesis) and some is held domestically undeclared, as a store of value and a medium of exchange for transactions involving the production and distribution of illegal goods and services, and for transactions earning income that is not reported to the IRS (the unreported economy hypothesis).  We find that the percentage of currency currently held overseas is between 30 and 37% rather than the widely cited figure of 65%.  This finding is based on the official Federal Reserve/Bureau of Economic Analysis data which is a proxy measure of the New York Federal Reserve’s (NYB) “confidential” data on wholesale currency shipments abroad.  'We recommend that the NYB data be aggregated so as to circumvent confidentiality concerns, and be made readily available to all researchers in order to shed greater light on the questions of how much US currency is abroad and on the particular location of overseas US dollars.  The newly revised official estimates of overseas currency holdings are employed to determine the Federal Reserve’s seigniorage earnings from 1964–2010 which have provided a $287 billion windfall for U.S. taxpayers.  Overseas currency stock data are also used to derive estimates of the domestically held stock of currency as well as narrow and broad measures of domestic monetary aggregates.  These domestic monetary aggregates are believed to be better predictors of future economic activity than traditional monetary aggregates and are tested to determine their ability to predict fluctuations in real output and prices. Domestic cash holdings are finally used to estimate the size of the U.S. unreported economy as measured by the amount of income that is not properly reported to the IRS. By 2010, we estimate that legal and illegal source unreported income is $1.9 - $2.4 trillion, implying a “tax gap” in the range of $400 – $540 billion.  Currently, we estimate that 18–23% of total reportable income is not properly reported to the IRS.


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