|Montreal, March 16, 2002 / No 100
by Harry Valentine
A recent report released by the Canadian Tax Foundation estimated that "Canadian governments were losing $44-billion a year to tax cheats and other criminals." It was estimated that government lost out on $22-billion from legal business transactions in 1995, the year the underground economy was estimated at $130-billion or 16% of the total of all goods and services produced. The study did indicate that increasing taxation between 1976 and 1995 contributed to driving people into the underground economy, driving the practice from 3.5% of the economy to 16%.
To deal with lost tax revenues to the underground economy, Ottawa recently
announced plans to increase staff in the tax department. Senior government
officials have yet to learn that while their plans, policies and programs
may appear to have some merit in the short term, in the long term government
invariably achieves the opposite of what it had once intended.
The people who are most adept at operating in the underground economy rarely, if ever, leave behind a paper trail. Several books have been written on the subject of how to become invisible to the state. An increase in tax collection vigilance by the state will invariably achieve what has occurred in the drug trade with drug prohibition laws. Many players will be forced out of the underground economy. Those who remain will become more sophisticated, especially the fraud and scam artists whose earnings can actually increase. Stringent drug enforcement laws have made the trade more lucrative, more sophisticated and more ruthless in direct response to and as a result of the stringent drug enforcement laws. A similar scenario may be expected to occur in other areas of the underground economy.
Drugs, prostitution, alcohol
The drug trade was one of the sectors singled out in Taxes and the Underground Economy by David Giles and Lindsay Tebbs as one of the underground sectors which avoids paying taxes. A trade very closely connected to the drug trade, prostitution, was also singled out for not paying taxes. The demand for prostitution services always existed and did not abate when the supply was curtailed by government policy. The state-imposed scarcity of the service merely drove up its price, in response to market demand. Government policy had increased the price of prostitution services and the amount of money circulating in that trade, inviting participation by underworld and gangland players. These are the same people who run the drug trade. The drug trade's customers are often people who have had similar dysfunctional family backgrounds as participants in the prostitution trade. Both are apt to resort to drug use as a means of dealing with anxiety-causing conditions in their lives, conditions that often had their origins in well-meaning government policies that backfired.
Prior to the era of social welfare, alcohol was the drug of choice. The epidemic of alcohol addiction began in America and Canada during the Great Depression, despite state enforced prohibition in the USA. Several free market economists such as Murray Rothbard, Ludwig von Mises, Henry Hazlitt and Friedrich Hayek have all offered similar explanations as to how government monetary policy enacted after 1910 in the UK and the USA set off a chain of events which culminated in the stock market crash of 1929 and the Great Depression that followed. Many people who lived in that era had to face an unintelligible psychological and economic nightmare that misguided government policies had visited upon them.
Prostitution increased as did the suicide rate, while many other people sought refuge from reality in the bottle. It is not a coincidence that the Alcoholics Anonymous support group was founded during the era of the Great Depression. Many young, Depression era children grew up seeing their parents escape from reality and seek solace in the bottle. This set off a precedent that would be repeated in families for successive generations. Alcoholism and similar addictions in one or both parents leads to dysfunctional behaviour in the family unit, which adversely affects the emotional and psychological development of any young and growing children in the family. When the era of social welfare began across the USA and Canada, the most likely welfare recipients were the adult children of the Depression era's original alcoholics.
While state welfare programs may originally have appeared to have had some merit, the program's most likely recipients were people raised in state-caused dysfunctional family environments. State welfare also caused an escalation in single motherhood and the phenomena of the "fatherless" child. A generation of such children have grown up with little or no positive adult male influence in their lives. A fellow QL columnist, David MacRae (see THE ROOT CAUSES OF CRIME, le QL, no 63), did an excellent presentation on the perils of fatherless children and their tendencies toward anti-social behaviour during their pre-teen years. As they grow up, they're at higher risk for bouts of depression, emotional control problems, low stress tolerance levels, suicide, drug and alcohol abuse, gang membership and criminal activity involving violence. In Canada, Quebec leads the country in suicides involving young men, a phenomena recently explored by another fellow QL columnist, Gilles Guénette (see LE SUICIDE AU QUÉBEC: UNE HISTOIRE DE GARS, le QL, no 78).
In Quebec, this problem is compounded by restrictive labour laws that forcibly prevent people from helping themselves by becoming self-employed in many peaceful areas of the open and underground economy. Recently, a family man from Otterville, Quebec, was charged under Quebec labour law and spent time in jail, then released and acquitted for a labour law violation. He was trying to support his family by doing honest renovation work in a private home. Opportunity to work without state imposed complication enables an individual (mainly those with low stress tolerance levels) to achieve a measure of self-sufficiency and self-reliance by offering services in exchange for remuneration. Such opportunity helps people from challenged backgrounds rebuild their lives and develop a greater sense of self-respect. A large number of such people offering services in this way keeps the cost of the services competitive, while also making certain fields less attractive to scam and fraud artists.
When the state uses forcible coercion to deny a segment of the population such opportunities as a political favour to the labour unions, people in this segment may see little hope for themselves. They may resort to drugs, alcoholism and even suicide as a means of dealing with their sense of hopelessness. This hopelessness situation facing a segment of Quebec's young male population is little different from the hopelessness situation Soviet economic policy imposed on their citizens, large numbers of whom resorted to alcoholism and suicide. During South Africa's apartheid era, people were denied access to certain professions, based on their racial/ethnic background. South Africa also had high rates of alcoholism and suicide. In Quebec, young Francophone men have the highest suicide rate in Canada, a direct result of how government policy impacted on their lives.
Government created dependency
The drug trend which began in the USA during America's involvement in the Vietnam conflict crossed the border into Canada during the late 1960's and early 1970's. Canadian descendants of Depression era alcoholics, their offspring as well as a segment of the emerging welfare class, were put at greater risk for alcohol as well as for drug addiction. Having grown up in emotionally dysfunctional homes, most were also at greater risk for academic failure in the public school systems. Many would drop out of school. Many would seek employment in an unskilled or low-skilled blue collar field. Some would eke out a living by peacefully offering a range of personal services in the underground economy, because it was easy and uncomplicated to do so.
State intrusion into the world of commerce adds complication and increases levels of stress and anxiety that most small time entrepreneurs from this group could not cope with. The behaviour of the State is to deny this segment of the population the opportunity to earn a living and take responsibility for themselves. People from challenged family backgrounds need such opportunities and engaging in peaceful activity the underground economy offers this to them. State welfare may have offered relief to many people in this group; however, it may also have become an addiction which destroyed their initiative as well as spirit to seek greater self-reliance and self-dependency.
To deal with the past mistakes they refuse to admit to, government officials propose to use taxation power to rectify the social problems that prior policies and programs either created or made worse. The government's attempts to collect more tax revenue from the underground economy may achieve the opposite of what government officials hope for. If the accused tax avoider is a private corporation engaged in the manufacture of a product, government officials could seize corporate assets and liquidate them to cover the taxes owed. This action may appease the social left; however, it could also impair the competitiveness of the corporation and put it at risk for possible bankruptcy as well as worker lay-offs. By going after corporations for more tax revenue, the government could inadvertently create more unemployment and even more social welfare recipients. In the long term, the money the government would be paying out in social assistance would exceed the value of the corporate assets which the state had liquidated.
Governmental attempts to obtain tax revenue from the prostitution trade could also achieve something other than what officials intended. Some of the unfortunate ladies who ply the bottom end of this trade may tell as to how they are unable to make ends meet on their minuscule monthly welfare or social assistance cheques. Ladies who provide companionship services at the high end of the trade may escape scrutiny by the tax department, lest some of the names of their elite clientele also appear in some government directories. Names of UK government ministers have more than once appeared on the clientele lists of call-girls like Mandy Rice-Davies and Christine Keeler. A tax-police investigation into the high end call-girl trade could duplicate the investigation scenario into the paedophile sex abuse allegations at Cornwall, Ontario.
Attempts to confiscate tax revenue from the drug trade would likely backfire and merely increase the ruthlessness in that trade. The tax collection policy may seem appealing in the short term. The history of the drug trade indicates that they would move even further underground and become even more sophisticated to deal with the state's new initiative. Past government anti-drug enforcement programs have had the effect of creating motorcycle gangs. The small players are taken out of the market, leaving the more sophisticated players. Higher drug prices follow from restricted supply and increased drug potency.
The drug lords already have their own laboratories and their next big breakthrough in genetically modified illicit drug production could be in DNA modification. If unemployed Soviet nuclear physicists can sell their expertise to willing buyers, so can unemployed foreign geneticists. The leaves of a DNA modified corn plant or the needles of a DNA modified pine tree could produce the THC ingredient more commonly found in marijuana plants. The active ingredients found in heroine, LSD, crack or ecstasy could similarly be produced in other types more common plants, through DNA modification. Government's attempts to curtail the drug trade and collect taxes from drug dealers could achieve the opposite of what government originally had intended. A far worse drug situation could result.
The government's most likely "underground economy" targets would be those citizens who have no connection to either the prostitution or drug trades. The prime suspects will be honest, peaceful, private people who have committed the crime of receiving cash, goods or services in voluntary exchange for doing deeds like private home repairs and renovations, private auto repair, private hair styling, typing services, snow-clearing, home appliance repairs, cooking services, private home cleaning and a host of other one-person "business" activities. Most of these "criminal suspects" may never have committed any acts of forcible physical coercion or fraud against any other citizens or their property. They may be people who were laid off from their jobs and were ineligible to collect social assistance. They may have been entrepreneurs who had prior business failures and who are endeavouring to take responsibility for themselves. They could be recent immigrants trying to earn a living and support their families because their foreign qualifications and experience was not recognised.
That their so-called "criminal" activities in the underground economy may have actually benefited other citizens living in their communities will be totally irrelevant in the eyes of the government officials. Also equally irrelevant is the possibility that their peaceful "criminal" acts may even have added value to the communities in which they live and saved higher levels of government from providing them with social assistance or welfare payments. When overzealous government officials finally catch up with these "criminals," most may be unable to pay their fines or their tax assessments. Most may end up incarcerated at Club-Fed, costing other taxpayers more money to keep them there, than what the tax department may have hoped to collect from them in fines and assessed back taxes. Quebec has shown that an alliance between the government and certain elements within the labour union movement can restrict and even eliminate certain types of honest and peaceful underground economic activities. A segment of the population has paid a high price for such an alliance.
At home with the tax-police
Economists such as Mises, Hazlitt, Rothbard and Hayek have shown that private individuals make more efficient use of money than government. Over the past several decades, stories have repeatedly appeared in the news media revealing how government programs either wasted or squandered public funds. A large underground economy can curtail government's tendency to waste and squander public funds on patronage projects, by keeping money away from the state. It can also curtail opportunities for fraud and scams. The honest, peaceful individuals who work in the underground economy do not have the luxury of wasting or squandering funds. They are hard-pressed to make as efficient use of the resources as they can. In so doing, their peaceful "criminal" actions may actually contribute constructively to the welfare and economic well-being of the communities in which they live. They achieve this by providing value to their customers, at competitive and affordable prices. Some of these customers may be operating on already stretched budgets. To provide their services, many of these "criminals" would have to purchase material supplies from the mainly tax paying merchants in their communities. However, the indirect and hidden taxes being paid by these "criminals" is deemed irrelevant in governmental circles.
It is evidently quite irrelevant to short-sighted government policy planners that large numbers of peaceful private citizens engaging in the voluntary exchange of goods and services, including bartering and swapping, in a civil environment that is free from state intrusion, is what contributes to building peace and harmony within diverse communities of people, regardless of their ethnic or cultural background. It helps people from dysfunctional and challenged backgrounds learn to build responsible lives. When a government moves to outlaw unrestrained peaceful exchange between its citizens by endeavouring to shut down a peaceful underground economy, that government has already undertaken a major step forward along the road toward the creation of a totalitarian state.
We may speculate that during the upcoming age of the tax-police, Canadian citizens will still have so-called rights like the freedom of speech and the freedom of association. Some information now carries a monetary value in the new information age and the tax-police could accuse us of trading in the underground economy, because we spoke to somebody else. Citizens could receive telephone calls to come to their local police station to "clear their name [...] and without bringing a lawyer" (as reported on CJOH news some time ago, certain prominent members of Ottawa's Muslim community actually did receive such telephone calls). They could then find themselves being queried as to the identities of people they associate with and information pertaining to any "exchanges" occurring amongst them.
At the present time, wildlife officers have authority to enter private homes, without need of a search warrant, to inspect the contents of freezers and refrigerators (to prevent edible wildlife from ending up on dinner tables). Using this precedent, the tax-police can be given similar powers. They could enter the home of a plumber when a car mechanic friend may be visiting, to investigate as to whether they are trading services non-monetarily. A lady hairdresser could have her friend and friend's computer-expert husband over for a home visit. The tax-police could enter her home to investigate if she's doing her friend's hair while the friend's husband is repairing or upgrading her home computer.
Whereas criminals charged under the law for having committed a violent act would be presumed innocent until proven guilty in a court of law, citizens accused of "defrauding the state by engaging in non-monetary transactions of services" may have little, if any, recourse in the future to defend themselves through the courts. Canadians of East German origin who lived in fear of the Stasi, or of Iranian origin who lived in fear of Savak, will feel right at home in Canada with the tax-police.
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