Pi Attitude Zone: Flexibility

One Step Ahead Of The Taxman

Italy is typical of countries with a vast black economy, and a breezy way of getting along despite ineffective government and patchy tax-collection.  But it seems somehow more surprising to find similar trends affecting the United States of America.

The USA has a reputation for low tolerance of tax evasion, thanks to the far-from-tender ministrations of the Internal Revenue Service, or IRS.  The new FATCA legislation aims to force foreign banks to snitch on Americans hiding their income abroad.  Yet something like two trillion dollars of taxable income falls off the IRS’ domestic radar each year.  Nor can this vast sum be explained away as purely the ill-gotten gains of fraudsters, mobsters and drug barons.  Most of it is unreported income being paid to ordinary people like construction-site laborers, domestic and child-care workers, and people who design websites from their kitchen tables.  Predictions that America would soon be a “cashless society” were not reckoning on all those people who get paid in cash, and hide their earnings from official scrutiny.

Financial crashes and a recessionary economy may be part of the explanation, but Pi suspects that most people who “go underground” in terms of reporting their earnings do it... because they can.   A surprising number of Americans choose to get along without banks, and their number is rising.  Cash holdings, as opposed to money stored electronically (and detectably), currently tops $750 billion.

The duration and severity of the recession has pushed more of America’s earned income out of sight than ever before.  People are sneaking off into the shadow economy in unprecedented numbers, and staying there for longer.  Part of the reason is obvious:  things like wanting to get unemployment benefits while still surreptitiously earning income.  But another reason seems to be a growing distrust of government, and a distaste for officialdom in all its forms.  The cash economy, and the tax evasion it betokens, can feel like “striking a blow for freedom”. 

Employers are unwittingly co-operating with this trend by changing their hiring practices towards part-time and as-needed term employment, which keeps employees out of the spotlight and saves the company big money in statutory benefit payments, payroll taxes and so on. 

The result is a social shift that is no longer easy to dismiss as a ‘blip’.  Younger workers, when they can get work at all, are less and less bothered by the idea of informal, casual and non-permanent employment. ‘ Rigid’ is on its way out.  ‘Freelance’ is the growing model.  Is lack of employment security a problem?  Well, if you didn’t expect a health plan, a pension or a severance payment in the first place, why would you miss them?

Pi says:  some people just prefer to be footloose and fancy-free… and paid in cash.

Zone: Flexibility Country: Multiple Geographies Product – Financial