JU’s Richard Cebula discusses ‘underground economy’ on C-SPAN

Jacksonville University Professor of Finance Richard J. Cebula provided insight on the United States’ underground economy Thursday, May 16, on the C-SPAN television network show “Washington Journal.”

A country’s “underground economy” is the financial activity that is unrecorded and untaxed by the government.

Cebula, the JU Davis College of Business Walker/Wells Fargo Endowed Chair in Finance, said his research estimates that about 21 percent of the U.S. gross domestic product is unreported, largely due to crimes linked to income tax evasion.

Cebula was recently ranked 129th among economists worldwide, based on number of publications, citations and pages published. He’s also included in “Who’s Who in Economics: A Biographical Dictionary of the Major Economists, 1700-1996” (3rd edition), which lists the 1,500 major economists of the past three centuries.

While some economists say the underground economy likely is much smaller than Cebula’s estimate, experts generally agree that the federal government misses out on at least $100 billion and possibly more than $200 billion in tax revenue is lost annually due to income tax evasion in the U.S., Cebula said.

“It’s the component of the economy that’s not visible, in a sense …” he said. “There’s a wide range of estimates. Truth be known, we’re not sure. It’s neither mammoth nor is it trivial.”

Narcotics sales and illegal gambling operations also are part of the underground economy, as are less-significant, unofficial business activities such as babysitting, operating a part-time landscaping business, and earned unreported tips as a waiter or bartender.

Click here to watch Cebula’s 40-minute C-SPAN interview

Cebula said the underground economy’s adverse impact could be minimized by replacing the federal income tax with a national retail sales tax.

“I think that is something worth very serious consideration,” he said.

Still, the United States has the smallest underground economy among developed countries with income tax systems, Cebula said.

“The IRS, except for its recent behaviors, has been doing a good job, an effective job, of collecting taxes and identifying income sources,” he said.

Cebula said income tax evaders spend an estimated 95 percent of money diverted from the IRS on goods and services, creating jobs, raising production, and increasing the gross domestic product.

“Were the funds collected by the IRS instead, on average those funds go to transfer payments and add much less to employment, production and GDP. Thus, there is a positive side to income tax evasion,” he said.

Cebula has authored 14 scholarly books and nearly 500 articles in refereed scholarly journals in finance, economics, general business, management and statistics. In addition to his Who’s Who listing, he is the “Journal of Regional Analysis and Policy” editor, the Journal of “Economics and Finance Education” senior editor, “The Open Economics Journal” and “International Journal of Finance and Accounting Studies” editor-in-chief, as well as the “Business and Economics Journal” chief editor.