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Sunday, July 4, 2010

The Growing Underground Economy

I was over at TSLRF and had commented on a post about money ("Good Places To Put Money").

I commented that I thought real estate still has a ways to drop, but gold and silver still have significant up-side.  I think we'll have some deflation, then ugly inflation.  If we or Israel attack Iran, all of this uber-inflation will happen more quickly.

A commenter named Chris had a lengthy, well-thought-out comment about why he thought precious metals might not be such a good idea.  In part, he said -
The thing is you will be taxed on that illusionary paper profit at the ugly collectibles rate of 28%. There will have to be some massive inflation to make up for that. So, after taxes, you will be able to buy a nice set of Italian Bermuda shorts.

So, unless you have a really good accountant or are prepared to commit massive tax fraud, I just don't see PM's as a great place for wealth. As the .gov's cash flow picture gets worse, I don't think they will suddenly decide to treat PM's more favorably or reduce IRS audits.
He's right.  At a minimum, you are legally obliged to pay - at a minimum - income tax on your gain between your purchase price and sales price.

He's also right in that, as things worsen, the government will pay more attention to precious metals transactions.

His comment got me thinking about barter and other supposed "shady deals" - transactions that happen off-the-books every single day which should technically have some sort of tax attached to them.

From what I understand (and this could be TOTALLY incorrect) if I trade the use of my lawnmower for two jars of peach jam, no tax is due.  That is, UNLESS I am a professional lawn maintenance person, or a profession peach jam maker.  Then, because my chosen, cash-earning profession is involved, taxes must be paid.

From what I have observed, no one ever pays taxes on any of these transactions.  I don't prepare taxes for a living, but I'd be shocked if a guy with a lawn mowing business gives his CPA a list of bartered items each year.

The government knows this.  I don't know if there will ever be a way to capture the taxes on these transactions unless they set up some sort of "sting" operation.  Would they ever do that?  I guess it depends on how desperate they get.  It would be a helluva reason to make an asset seizure...

I can see them doing something about sites such as Craigslist.  In their eyes, it must look like the equivalent of a site advertising free child porn, but for non-taxed products and services.  They must be very angry.

Ironically, although CL is run by dyed-in-the-wool socialists, it is essentially engaged in promoting the exchange of goods and services where no tax is involved.  How will the .gov's get their piece-of-the-pie?

If they can't figure that out, I'd guess they will shut it down under some, "Enemy of the state" law.

That brings us back to precious metals.  As commenter Chris noted, lots of taxes will be due when your PMs are sold.  I'm guessing that, like Craigslist or even barter transactions, people will (and do) consciously not pay taxes on their gains.

Unless there is a very conspicuous "paper trail" - buying or selling from an online source, or buying in-person with a debit or credit card - people see no reason to give up any of their gains to the government.  When you sell your coins to a shop, the transaction is supposed to be recorded.  It assumes that the name given to the store owner is your real name.

My guess is that the .gov will further clamp down on coin and jewelry shops over the next few years - just like they did with banks.  While the justification will be "to fight terrorism," its actual goal will be to separate you from your money.

That will simply push people further and further into the Underground Economy.  It'll be Craigslist On Steroids.  It has happened every time in every country that raises taxes above some level of fiscal discomfort - I read 20% somewhere.

We're clearly above that threshold now, and it will be getting much worse in the months and years to come.  The jobs the administration is helping to create are not the kind they had in mind!

Here in California, if you make a marginally-decent income, your income is already taxed about 60% (state and fed income tax).  You then have property taxes, gas tax, sales tax, bridge tolls (which just increased 25% here in Nor Cal), communications taxes, tobacco taxes, alcohol taxes, power-supply taxes and water taxes to eat up your remaining dollars.  If (when) a Value Added Tax (VAT) is put in place, we'll be paying taxes on our food as well.

Not much left after your income has been redistributed.

Accept The Challenge

It's gut-check time.  Do you think you're over-taxed?  If so, will you (or do you) willingly break our tax laws?

It is not such an easy question, especially when you've been raised as a law-abiding, follow-the-rules citizen.  Everyone has to make their own choices, but it's really a black-or-white issue:  You'll either follow our laws, or you won't.  If we pick-and-choose the laws we want to follow, don't we have anarchy?

Or is there a morally justified "gray area" in all of this?

One of my favorite Ayn Rand quotes comes to mind -
"There's no way to rule innocent men. The only power any government has is the power to crack down on criminals. Well, when there aren't enough criminals, one makes them. One declares so many things to be a crime that it becomes impossible for men to live without breaking laws."
Kind of interesting.  Today is Independence Day.  Weren't taxes involved way-back-when....?

Plan accordingly.

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Ryan said...

I recall somebody once said that people generally ignore laws they consider stupid.

I can definitely see more and more people getting into the one foot in, one foot out pattern of the underground economy. Most of us work a normal job and have taxes withheld. Pretty much impossible to dodge that and have a normalish job. Also it is pretty hard to own real property, conduct modern banking or invest without a reported income and not bring up big red flags.

However when they do side jobs it will be for cash. If they buy or sell stuff they will avoid taxes. People will barter more often. Used car sales will be with personal checks and the bill of sale will be for less than the value of that check to save both parties taxes.

suek said...

Good points all. Considering the recent bill - don't remember which - that makes all our banking transactions and credit info also available to the government without a warrant of some kind, I anticipate that not only will the future be "under the table", but also all cash.

Bartering is theoretically taxable - but as you point out, pretty darn difficult to trace.

Anonymous said...

I know you already know this but it doesn't hurt to reiterate it: We already pay taxes on food and medicines. They are hidden taxes that the companies and small businesses pay and pass along to consumers. Every penny of tax the farmer pays is passed on to the middleman who buy their produce. Every penny the middleman pays is passed on to the big agriculture company or distributer that buys the produce. Every penny of tax the big guy pays is passed on to the wholesaler or retailers who sell the produce to you. And of course they pass on their taxes to you as well. It is likely that your $1.99 loaf of bread has $.40-$.50 tax hidden in it. And don't forget the fees and other forms of taxes the states and local municipalities assess. Ultimately the consumers pay all taxes. An important fact for anyone who believes the government should force big corporations to pay more taxes.

Lucas @SurvivalCache said...

Excellent article, I think your analysis is spot on.

Another thing in the same vain to keep in mind: We are quickly heading towards a cashless society.

The powers that be are pushing absolutely everything towards electronic transactions via cards, and later chips.

Eventually we won't even have cash to rely on for personal trades and it will have to be strictly bartering.

suek said...

>>Eventually we won't even have cash to rely on for personal trades and it will have to be strictly bartering.>>

Now _that's_ something to consider. I'm not sure we'll ever reach that point - that people won't somehow figure out _some_ physical medium of exchange. But your point is well taken - it would benefit a government to eliminate cash in order to enable them to track economic activity so that they don't miss out on a possible tax opportunity.

Chief Instructor said...

Ryan, yep, there will be a lot more barter and cash transactions. People have had enough taxation.

Anon 8:08 - that always amazes me when I hear people say that the evil corporations need to pay more taxes. Most don't understand the exact point you made - every penny of tax paid by a corp is passed along to the end consumer. The taxers make great use of propaganda - "XYZ Corp made OBSCENE profits, and they need to pay their fair share for ...."

Lucas, agreed. Everything is being focused on electronic transactions. Checks are now scanned at the point of sale and returned to the writer. Most government welfare payments are done with debit cards. They will use safety and security as the justification to do away with cash, and most people won't care about giving up their privacy.

suek, I think doing away with cash is a ways down the road, BUT I could see it being accelerated if we ever had a Weimar Republic-like inflationary period. I could see them using that as an excuse to do away with cash. Maybe.

The thing to keep an eye out for is when the technology is available where I can take my debit card to immediately "hand" you twenty bucks. Person to person without a merchant being involved. You can almost do it now with Paypal, so it's not way off in the future, IMO.

MikeH. said...

It's early yet and my few working brain cells are firing in a spray and pray mode. Sometimes they hit but most of the time they leave me sitting here with drool flowing from the corner of my mouth.

In trying to wrap my head around the implications of a cashless society, I am drawn to wonder about the effects on the weekend ritual of garage sale-ing.

For example: I have an accumulation of old stuff taking up valuable space in my house and / or garage so, I have a garage sale. In a cashless society, forced into underground bartering, I would be taking in your old stuff in order to off load my old stuff. How do you gain space in that situation?

Or, consider the other weekend ritual of flea markets. It would turn into a junk for junk exchange.

I'm trying to imagine roadside produce stands, all being issued wireless debit / credit card scanners. The other alternative would be a transition to produce / flea stands, where some happy grower will be as giddy as a sissy at Boys Town, to barter his goods for your junk.

It may be a very trivial thought matter here but, going cashless would nearly shut down the "casual sale" industry in America. It's the flip side of the tanking economy that's shutting down storefront businesses across this country.

When it's all said and done, we will be reduced to little more than welfare drones, who will be totally dependent upon the government to issue us everything we need to survive, in a military quartermaster style.

One insignificant appearing brick at a time. That's how they are going to take us down. One brick at a time.


Anonymous said...

For what it's worth I don't think most people think "cashless" is really "cashless"! I think what they mean is that most people use credit, ATM, bill pay, etc. Now maybe some people won't embrace that. I myself use cash except for bills I mail or rental cars and airfares. I haven't written a check to a retailer in 30 years or more and my ATM won't work as a debit card (by request).

Chief Instructor said...

Mike, to go truly cashless, it will have to have convenience for person-to-person transfers. You might have a debit card-looking device. You tap into it $20. You grasp it so that your thumb authenticates that you are the owner. The person you're giving money to has his card as well. They tap cards, and an RFID chip-to-chip transfer happens. It uses something along the lines of the current G3 network.

In addition to the technical challenges (which are pretty much whipped) the problems are more social or societal. EVERYONE would need to be on the program for it to work, and I don't know how you'd do that. Although we've somehow made it off the transfer of gold and silver coin, and fully accept paper promissory notes.

Anon 7:45, I think that's how people now think of "cashless". The point I was making was that the .gov is missing a ton of taxable income by allowing us proles to use cash. You can't tie its use to any specific transaction. A thousand bucks in my pocket could have come from an ATM withdrawal, a drug sale, a garage sale or I found it laying on the street.

It's funny what you noted about checks: I only write checks when I need an audit trail - paying taxes, etc. Most of my spending is either debit cards or cash.

Lloyd said...

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Bitmap said...

The point where people start flocking to an underground barter economy to avoid increasing taxes is not a given percentage. It is strongly impacted by how well the economy is doing overall. If the economy if flying high and people are making a lot of money then the tax rate threshold will be much higher than when times are tough.

Chief Instructor said...

Lloyd, thank you for the kind words. I'll stop by for a peek.

Bitmap, I believe, historically, the tax rates and the performance of the economy have usually gone hand-in-hand. Economy goes south, .gov starts running out of money, they raise the taxes, people go underground.

The whole, "vicious circle" deal.

Your point is well-taken, though about people not caring about what the .gov does when things are good. They don't care as much about taxes, and don't pay attention to politics - and we end up with the cabal of crooks we're saddled with.