Taxes and the Gig Economy

There has always been an underground economy, sometimes referred to as a shadow economy, and more recently described as the Gig economy, with the rise of such relatively new activities, such as home and ride sharing.

Investopedia defines the underground economy as illegal economic activity.  Transactions in the underground economy are illegal, either because the good or service traded is itself illegal, or because an otherwise licit transaction does not comply with government reporting requirements.  This means that many completely legal every day transactions, such as housekeeping, child care, ride sharing, Airbnb, etc., are only illegal when appropriate taxes are not paid.

Without going into all of the nuances relating to underground activity, the issues for today are the economy and unpaid taxes.  This is not chump change.  It has been estimated that in 2012 the worldwide underground economy amounted to $2 trillion and the IRS estimated that the United States lost $500 billion in taxes in 2012 because of unreported income.  Thanks in part to ride and home sharing, the amounts involved are almost certainly much larger currently.

In addition to the obvious issue of tax evasion, which means the rest of us have to pay more, investors should note that the economy may be considerably stronger than suggested by government unemployment data.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®