Underground economy

The underground economy or shadow economy consists of all commerce that is not taxed. This market includes not only legally-prohibited commerce (for example, drugs, prostitution, and gambling are illegal in some locales), but trade in legal goods and services because some income is not reported and consequently taxation is avoided, through money laundering, payment in cash (which almost never can be traced), or other means. The underground economy also includes transactions that governments may allow to be free of taxation, either by legal sanction or by simply choosing to refrain from enforcement of tax laws in certain markets. The term underground economy typically is not used to refer to trade in stolen goods, which may more appropriately fall under the definition of the "black market". Underground economy transactions are typically cash transactions to avoid traceability by governments or complex financial operations involving the use of multiple subsidiaries and tax havens, as the Attac NGO has underlined. The Clearstream scandal is a perfect example of such tax evasion. Based in Luxembourg, Clearstream practices financial clearing, which means it centralize operations of multiple banks, some based in tax havens.

Some estimates of the size of the underground economy in the U.S. alone range to up to $1 trillion.

Measurement of the size of the underground economy is subject to a large margin of error. Economists seeking to measure its size have often looked at the volume of cash in circulation, although a large part of the underground economy takes place via bank accounts located in tax havens. Discrepancies between the growth of officially reported spending (GDP) and the growth of cash in circulation may be used to infer growth in the size of the underground economy, but these estimates are subject to a considerable amount of judgement, and are controversial.

The growth of online commerce may have increased the size of the underground economy. eBay has over 40 million regular users, including international users. The sellers are legally responsible to pay taxes^[1]. However, there is no report on how many actually do, and government rarely if ever intervenes to ensure that they do.

The underground economy, when trading decisions are not the result of coercion, is arguably a free market, since, by definition, it lacks government intervention. However, various governments have engaged themselves in the underground economy, thus blurring the line between public intervention and its absence.