The income gap between wealth and poverty has emerged again
as a political issue. Many talk about it as an established fact, and the
measurement of income inequality is rarely challenged. But problems with
measurement point to the likelihood that income inequality in the U.S. has been
exaggerated.
Every society has an income gap. The question has always
been about its size and momentum. The most commonly used statistical measure of
income inequality, the Gini Coefficient, exaggerates income inequality in the
U.S. because it ignores the growing underground economy, which has evolved in
the U.S. to avoid taxation and regulation.
Professor Edgar Feige of the University of Wisconsin
estimates this invisible cash economy to be worth at least $2 trillion in
unmeasured gross domestic product, with about $500 billion in tax revenues currently
being lost from these cash-based, tax-avoidance activities.
As Gene Epstein pointed out in a recent Economic Beat
column, there is a factual gap in the measurement of the cash economy. Many
Americans are moving from cash to credit. Just watch how many people pay for
their morning coffee with a credit card. But the amount of cash in the U.S.
economy has grown to $1.4 trillion as of August 2015.
This is 2.6 times the amount of cash in the economy in 2000,
growing faster than either GDP or the population. There is now about $11,000 in
cash for each household. By factoring in average velocity for money with zero
maturity, it appears the equivalent income approaches $16,000 per household.
Hernando de Soto and other researchers suggest that most of
the cash transactions in the shadow economy take place between low-income
members of the population. Friedrich Schneider estimated in 2010 that about $20
trillion—31% of the world’s economy—is transacted in shadow activities.
This occurs for several major reasons. Tax avoidance is
probably the largest. Then comes verification, because cash on the table is
indisputably real. Cash transactions also avoid inconvenient laws and
regulations prohibiting or limiting certain businesses.
Just think of a retail drug deal. The seller does not pay
taxes on his profit; he doesn’t take credit cards or give receipts; he is
conducting an illegal business.
EVEN FOR LEGAL BUSINESSES, taxes are a burden, cash is king,
and regulation grows with every session of the legislature. The users of cash
in the U.S. shadow economy frequent flea markets, roadside stands, farmers’
markets, eBay, and craigslist, as well as local and regional “for sale by
owner” publications.
This is a huge part of the U.S. economy, though governments
can’t control it or require accurate reporting on business transactions. Many
providers offer two prices—one for cash and the other for a credit card or
check. When cash transactions are deeply discounted, it may be a sign of the
underground economy.
People using cash to conduct financial activities in the
shadows may often be people receiving means-tested government benefits. They
use cash to hide their income and avoid losing their benefits. They also tend
to be those employed in service occupations, such as off-the-books domestic
workers, landscapers, caregivers, hourly or day construction workers,
musicians, entertainers, and Web designers.
The wealthy may well be involved in the process of moving
cash in the shadow economy, but it will be for services provided to them, not
for services rendered by them. That would reduce the net income of the rich and
increase the net income of the poor.
The U.S. has approximately 120 million households. If about
80% of the income in the shadow economy accrues to the poorest third of U.S.
households (about 40 million), income in the lower economic level is being
understated in official figures by as much as $30,000 to $40,000 a year per
household.
This does not suggest that these households are moving from
dire poverty to middle class, but it certainly argues that the size and
momentum of income disparity are likely to be exaggerated.
GARY C. BYRNE is president of Vesta Capital Partners in
Santa Barbara, Calif. KEN GLOZER is president of OMB Professionals in Ashburn,
Va.
<http://online.barrons.com/public/search/results.html?KEYWORDS=%22GARY%20C.%20BYRNE%20AND%20KEN%20GLOZER%22&ARTICLESEARCHQUERY_PARSER=bylineOR>
1 comment:
Well, I like cash because it's simple, so I find the tone of this guest writer extremely offensive. On consideration, I think the reasons why it's offensive may be more pertinent to others here than they first thought. A cashless society is a fascist society. Remember "The Handmaid's Tale," the book not the movie...the plague of sterility was added to bring in a kinky sex motif to catch people's attention, but in real life a cashless society *would be* a society where dissidents' credit would be wiped out and they could become slaves or prisoners overnight.
Thinking just for today, this author also seems to forget the #1 reason why I charge extra if I accept any non-cash transactions: *Paying with anything other than cash brings in other parties to the transaction, who claim their cut somewhere along the way.* When stores accept non-cash payments for no extra fee, that's a sign that *everybody* is paying more--prices have to be raised to cover the cost to the seller for processing these payments.
At my web site, I blog about secondhand books that I have (or had) for sale in a real-world store. To buy the books in real life costs $1 or less. To buy them online costs $10 or more, because it costs me so much more, not just to ship the books but also to go through the hassle of online payment.
Cash is the economic base of a free society. Non-cash payments are a convenience for people with some types of disabilities, especially addicts, so I do occasionally accept payment other than cash...but I always regret it...when the utility company tacks on a late fee because some corporation took an extra four days to "process" a payment, when I spend a day going to an out-of-town bank because the bank in my town is feuding with the bank on which somebody wrote a check, when I not only haven't been paid for the job that's supposed to be paid directly into the account but find that I've actually been billed for *not& having done anything on that account. Any time I participate in a non-cash transaction, I end up doing a lot of other people's bookkeeping for them, even though none of those people did the work or received the benefits for which the payment is being made.
And, just for the record...I don't collect any kind of federal "benefits," although my income has often been well below the incomes of some welfare cheats who do. But I wouldn't *dare* use a bank debit card in a store, because these days welfare cheats receive their handouts in card form, so anybody using any kind of card in a store is perceived as a welfare cheat.
And need we even mention that the #1 reason why people *do* choose non-cash payment is that they don't actually have the money? While a minority of people do use credit cards responsibly, credit card companies certainly don't encourage that. Even when non-cash payment helps addicts stay away from the drug scene or geriatric patients worry less about forgetting their wallets, non-cash payment encourages overspending and enslaves many young people to a parasitic industry that contributes no real benefit to society.
Nice people *always* carry cash. Democratic governments respect this practice and, instead of circulating nasty insinuations about why anybody would be so--well, frugal--as to pay in cash, democratic governments shift from income taxes to per-use fees on services government provides.
Post a Comment