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Tim Worstall Contributor


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People Dodging Taxes Is Not A Cost To The Economy

There’s a horrible and pernicious idea out there that people not paying their taxes properly is a cost to the whole economy. This simply is not true and it’s making the mistake of thinking that government, or the Treasury, is the economy as a whole. It isn’t: the economy is the economy and the Treasury is the Treasury, they are different things.

Please note that this is not some anarchist screed, that if we didn’t have tax at all then we’d all be better off: that isn’t true either. There are some things that have to be done, there are some things that can only be done by government and there’s even an overlap, in that there are some things that must be done and which can only be done by government. Therefore government we must have and also the requisite taxation to pay for it. That I or others might think that that overlap is rather smaller than what government currently attempts to do might well be true: that we think it might be true and that it might be true could be true.

But all of that is very different from trying to argue that tax dodging costs the economy in any manner:




They’ve the terminology slightly wrong there.  The black economy is things that are themselves illegal: drugs, the sex business perhaps, dependent upon jurisdiction. The grey economy is that part of it which is intrinsically legal but which isn’t paying the correct tithes to government on that economic activity. To illustrate the difference, under Colorado law selling cannabis might be grey economy if you’re not paying taxes but it is not black economy because the sale of cannabis is (under State law at least) itself legal. Selling cannabis in Indiana would be black economy whether or not you paid tax on your income from having done so as the activity itself is illegal.

But there’s a much larger mistake being made there, which is to conclude that the non-payment to the Treasury is a cost to the economy. The economy is the sum of all economic activity. So, economic activity which takes place, whether it pays to the Treasury or not, is still part of that economy. Not paying tax cannot therefore be a cost to the “economy”. It might well be a cost to the Treasury, or a loss of government revenue, but this is just not the same thing as a cost to the economy.

We can even take this further. We know very well that the levying of any tax leads to a loss of economic activity. This is the “deadweight cost” of taxation. A reasonable estimate at the current taxation margin is that such deadweight costs are about one third, 30% or so. We might therefore usefully assume that if full tax were rigorously collected from this currently untaxed activity then the amount of economic activity would be some 30% less. Thus it is tax which is the cost to the size of the economy, not the absence of its payment.

If the current grey market were fully taxed it would be smaller than it is untaxed: so the grey market cannot be a cost to the economy although the rigorous implementation of tax can be and probably is.

None of this means we shouldn’t try to impose the tax laws we have, nor change them if we so desire. It’s simply that grey market activity, the non-payment of tax, is not a cost to the economy.

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