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  • Edgar L. Feige is Professor of Economics Emeritus at the University of Wisconsin-Madison. A graduate of Columbia Univ... moreedit
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This chapter examines the meaning and measurement of various underground economies and puts forth the hypothesis that the empirical anomaly of Stagflation during the 1970's can be partially explained by the growth of the unreported and... more
This chapter examines the meaning and measurement of various underground economies and puts forth the hypothesis that the empirical anomaly of Stagflation during the 1970's can be partially explained by the growth of the unreported and unrecorded economies.
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A vast array of information about economic activity, political behavior and social trends are summarized in quantitative measures, sometimes in a single number such as GDP. Because of their apparent objectivity, simplicity and... more
A vast array of information about economic activity, political behavior and social trends are summarized in quantitative measures, sometimes in a single number such as GDP. Because of their apparent objectivity, simplicity and universality, these measures are used as a basis for both scientific investigations and in the formulation of public policy. These critical ‘facts” are often subject to what we call observer-subject- policy feedback, an interactive mechanism that can seriously distort and bias the economic, social and political indicators that are typically treated as exogenous observations on our complex systems. In fact, information is often endogenous to the system being studied, and a failure to recognize the observer-subject-policymaker feedback mechanism can result in “rational” decisions being based on ‘irrational” information systems. Indeed, we argue that the information content of social indicators is likely to become distorted by the very operation of the economic, social and political institutions they seek to describe. The unobserved economy is an exemplar of this interactive process. Reference: The Underground Economies: Tax Evasion and Information Distortion. Edgar L. Feige (ed.) Cambridge University Press, 1989.
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One of the enduring themes in German Jewish history has been the deep-seated desire of Jews to be fully accepted as equals by other Germans, including the right to worship freely. Their conscription and voluntary service in the military... more
One of the enduring themes in German Jewish history has been the deep-seated desire of Jews to be fully accepted as equals by other Germans, including the right to worship freely. Their conscription and voluntary service in the military during both the Franco-Prussian War (1870-1871) and World War I (1914-1918), provided an opportunity for Jews to demonstrate their fealty to the nation. Moreover, their requests for Jewish military chaplains were granted, enabling them to celebrate their traditional High Holy Days services. This article tells the story of Jewish religious worship on Yom Kippur during both wars as depicted by German artists.  We examine contemporaneous accounts of the scenes depicted, and find that while some were accurate with respect to venue and mood, the most popular images of throngs of Jewish soldiers worshiping on open air battlefields were fictionalized images of events that never took place. These pictorial images, exaggerated, romanticized, and idealized, portrayed Jews as patriotic Germans, fully engaged with the wartime goals of the German government while practicing their unique forms of worship. German Jews and Jews throughout the diaspora clung to these images which became widely available on postcards, lithographs, and cloth wall hangings.  They continued to be proudly displayed in Jewish homes as symbols of Jewish patriotism, until the end of World War I when blatant antisemitism falsely blamed the Jews for Germany’s defeat.
Page 1. EDGAR L. FEIGE and ROBERT MCGEE* Has the Federal Reserve Shifted from a Policy of Interest Rate Targets to a Policy of Monetary Aggregate Targets? PRIOR TO 1970 the Federal Reserve gave primary emphasis ...
Page 1. EDGAR L. FEIGE and ROBERT McGEE* Money Supply Control and Lagged Reserve Accounting INTRODUCTION The growing interest in "monetarism" that developed during the past decade focused renewed interest ...
EDGAR L. FEIGE & ROBERT T. McGEE Tax Revenue Losses and the Unobserved Economy in the UK Introduction Edgar Feige's article (JEA, 1.4, July 1981) presented preliminary calculations which suggested that the UK's... more
EDGAR L. FEIGE & ROBERT T. McGEE Tax Revenue Losses and the Unobserved Economy in the UK Introduction Edgar Feige's article (JEA, 1.4, July 1981) presented preliminary calculations which suggested that the UK's unobserved sector might be as large as £28 billion ...
This chapter examines the extent to which the U.S. dollar has become the de facto currency in Latin America. The amounts of U.S. dollars in circulation in various Latin American countries were estimated. Argentina had the highest level of... more
This chapter examines the extent to which the U.S. dollar has become the de facto currency in Latin America. The amounts of U.S. dollars in circulation in various Latin American countries were estimated. Argentina had the highest level of de facto dollarization. It represents a classic case of hysteresis, suggesting that once a threshold level of dollarization is reached, it may be maintained, producing what is called a dollarization “irreversibility”.
Despite financial innovations that have created important new substitutes for cash usage, per capita holdings of U.S. currency amount to $2950. Yet American households and businesses admit to holding only 15 percent of the currency stock,... more
Despite financial innovations that have created important new substitutes for cash usage, per capita holdings of U.S. currency amount to $2950. Yet American households and businesses admit to holding only 15 percent of the currency stock, leaving the whereabouts of 85 percent unknown. Some fraction of this unaccounted for currency is held abroad (the dollarization hypothesis) and some is held domestically undeclared, as a store of value and a medium of exchange for transactions involving the production and distribution of illegal goods and services, and for transactions earning income that is not reported to the IRS (the unreported economy hypothesis). We find that the percentage of U.S. currency currently held overseas is between 30-37 percent rather than the widely cited figure of 65 percent. This finding is based on the official Federal Reserve/Bureau of Economic Analysis data which is a proxy measure of the New York Federal Reserve"s (NYB) "confidential" data on w...
We examine the extent, causes and consequences of transition countries ’ use of foreign currency as a co-circulating medium of exchange and store of value. Using new estimates of foreign cash in circulation, we obtain unique measures of... more
We examine the extent, causes and consequences of transition countries ’ use of foreign currency as a co-circulating medium of exchange and store of value. Using new estimates of foreign cash in circulation, we obtain unique measures of currency substitution, asset substitution, and dollarization, and examine the consequences of network externalities for hysteresis and irreversibility. Finally, we examine factors leading some transition countries to euroize officially and bilaterally, and others to euroize unilaterally- that is, without prior sanction by the EMU.
Abstract: Professor Schneider’s “Comment” on my “Reflections” paper does not adequately address the key issues concerning the veracity of his findings, namely issues of documentation, normalization, calibration and replication. Further... more
Abstract: Professor Schneider’s “Comment” on my “Reflections” paper does not adequately address the key issues concerning the veracity of his findings, namely issues of documentation, normalization, calibration and replication. Further findings of inadequate documentation, suspicious normalization procedures, unexplained calibration errors and the inability to replicate the results; reinforces the conclusions of my original “Reflections” paper. Schneider’s Shadow Economy results suffer from conceptual flaws, arbitrary data manipulations and insufficient documentation for replication, questioning their place in the academic, policy and popular literature.
This paper analyses the problem of natural resource scarcity and its implications for economic development and international cooperation. We examine the meaning and measurement of resource "scarcity" and its implications for... more
This paper analyses the problem of natural resource scarcity and its implications for economic development and international cooperation. We examine the meaning and measurement of resource "scarcity" and its implications for economic growth and development. The paper describes the conditions required for the efficient use of exhaustible natural resources and for optimal inter-temporal efficient paths and considers the consequences of uncertainty, risk, externalities, disequilibria and institutional constraints on the market’s ability to achieve efficient resource utilization. Particular attention is paid to the implications of the cartelization of natural resource industries and the disturbing tendency to use political rather than economic motivations as the basis for resource production and distribution decisions. Reference: Resources and Development: Natural Resource Polices and Economic Development in an Interdependent World. P. Dorner and M.A.El- Shafie (eds), University of Wisconsin Press, 1980
The paper reviews the history, meaning , measurement and management of seigniorage.
Page 1. [3] The Underground Economy and the Currency Enigma EdgarL Feige" Abstract The size* growth und causes of {he U-Sr "underground economy" are re-examined in light of new estimates of foreign holding* of... more
Page 1. [3] The Underground Economy and the Currency Enigma EdgarL Feige" Abstract The size* growth und causes of {he U-Sr "underground economy" are re-examined in light of new estimates of foreign holding* of US currency. ...
ABSTRACT An important factor that helps distinguish between alternative balance of payments theories is the assumed causal relationship between the domestic credit and reserve components of a country's monetary base. This paper... more
ABSTRACT An important factor that helps distinguish between alternative balance of payments theories is the assumed causal relationship between the domestic credit and reserve components of a country's monetary base. This paper reports test results of this causal relationship in Australia, Belgium, France, Germany, Norway, and Sweden. Three causal detection methods are used: the Haugh test, the Granger test, and the Sims test. Two conclusions are drawn. First, the causal relationship does not run undirectionally from domestic credit to reserves as the Monetary Approach to the Balance of Payments and many tests of that approach assume. Second, the results are quite robust across alternative causality tests.
The transition from a planned to a market oriented economy requires a complex amalgam of stabilization, liberalization and privatization policies. This paper outlines a combination of policies believed to be necessary, if not sufficient... more
The transition from a planned to a market oriented economy requires a complex amalgam of stabilization, liberalization and privatization policies. This paper outlines a combination of policies believed to be necessary, if not sufficient to enlist the efficiency of market mechanisms along with a more equalitarian distribution of wealth that can provide a natural safety for citizens during the transition process. Reference: Challenge, May/June 1990, pp. 46-53
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I propose the replacement of our current system of individual and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes with a single comprehensive “revenue neutral” Automated Payment Transaction... more
I propose the replacement of our current system of individual and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes with a single comprehensive “revenue neutral” Automated Payment Transaction (APT) tax. The APT tax consists of a flat rate tax levied on all voluntary transactions. The total volume of transactions represents the broadest conceivable tax base and therefore requires the lowest conceivable marginal tax rate. Since the efficiency (misallocation) costs of a tax system tend to rise geometrically with the marginal tax rate, a massive reduction in tax rates can save an estimated $300 billion of misallocation costs associated with the current tax system. The APT tax is automatically assessed and collected when transactions are routinely settled through the electronic technology of the bank/payments clearing system with no deductions, exemptions, or exclusions. The APT tax also imposes an automatically collected tax on cash as it en...
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This paper examines the role of “observer-subject feedback” namely the interaction effect between the social science observer and the subject being observed. When the observer is the government and the subject is a citizen, it is often... more
This paper examines the role of “observer-subject feedback” namely the interaction effect between the social science observer and the subject being observed. When the observer is the government and the subject is a citizen, it is often the case that the subject may have incentives to distort the information given to the observer. When this occurs, information becomes endogenous to the economic system, and distorted information, can in turn have negative feedback consequences when it is used by policymakers to affect the system itself. The underground (unobserved, unrecorded) economy is a prime example of endogenous information bias arising from observer-subject feedback. The paper analyses the dynamics of the unobserved economy and its consequences for our scientific perceptions.
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Abstract The rapid growth of substitutes for cash, particularly debit and credit cards, has led economists to predict the advent of the “cashless society”. Yet cash holdings in most developed economies continue to grow and in the U.S.,... more
Abstract The rapid growth of substitutes for cash, particularly debit and credit cards, has led economists to predict the advent of the “cashless society”. Yet cash holdings in most developed economies continue to grow and in the U.S., per capita currency holdings now amount to $3000. This paper revisits the long-standing controversy concerning the whereabouts of U.S. cash. Specifically, we employ a previously confidential data source on net shipments of U.S. currency abroad to re-estimate the fraction of U.S. currency held overseas. Contrary to the widely cited figure that 65 percent of U.S. currency is abroad, we now find that direct evidence supports the notion that overseas holdings amount to less than 25 percent. Currently, the official figure for the percent of U.S. currency held abroad as published by the Federal Reserve in their Flow of Funds Accounts and by the Bureau of Economic Analysis in the U.S. Balance of Payments Accounts is 37 percent. This official figure is a prox...
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In earlier papers on “Socialist privatization” Feige proposed a sequential set of stabilization, privatization and liberalization policies designed to provide the necessary, albeit not sufficient conditions, for a transition from a... more
In earlier papers on “Socialist privatization” Feige proposed a sequential set of stabilization, privatization and liberalization policies designed to provide the necessary, albeit not sufficient conditions, for a transition from a planned to a market economy. An important component of the proposed policy package was an equalitarian distribution of a portion of “state” wealth to private citizens by means of a voucher program whose aim was to establish a social safety net of private wealth composed of “citizen shares” to cushion the disruptions and lessen the hardships of the transition process. This paper estimates the value of the proposed “citizen shares” and finds that they would have provided a significant social safety net as well as a powerful incentive for Soviet citizens to support the reform program. The problem with the proposed voucher program was not that it provided too little incentive. The problem was that the government failed to provide the relevant information to t...
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And 132 more

10:27am CST by alanbenesi, Community 15 4 Unfair taxation is one of my pet peeves. The present system of personal and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes is complicated and... more
10:27am CST by alanbenesi, Community 15 4 Unfair taxation is one of my pet peeves. The present system of personal and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes is complicated and subject to evasion. Human nature being what it is the wealthy and large businesses have used their money and power to obtain tax breaks and loopholes. They also have tax lawyers and accountants to assist in minimizing their taxes. In 1989 Professor Edgar Feige of the University of Wisconsin proposed replacing the present tax system with the Automated Payment Transactions (APT) tax
This paper proposes a 21st century global fiscal architecture to replace the present system of personal and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes with a single comprehensive... more
This paper proposes a 21st century global fiscal architecture to replace the present system of personal and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes with a single comprehensive revenue neutral Automated Payment Transaction (APT) tax. In its simplest form, the APT tax consists of a flat tax levied on all transactions. The tax is automatically assessed and collected when transactions are settled through the electronic technology of the banking/ payments system. The APT tax introduces progressivity through the tax base rather than via the rate structure. Since roughly 85% of all transactions involve the exchange of financial instruments, it is the wealthy who carry out a disproportionate share of total transactions and therefore bear a disproportionate burden of the tax despite its flat rate structure. The automated recording of all APT tax payments by firms and individuals creates a degree of transparency and perceived fairness that induces greater tax compliance. Also, the tax has lower administrative and compliance cost. Like all taxes, the APT tax creates new distortions whose costs must be weighted against the benefits obtained by replacing the current tax system.
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This paper presented at the International Institute Of Public Finance Meetings on August 28th, 1989 examines the desirability and feasibility of introducing a financial transactions tax on all transactions to replace the present system of... more
This paper presented at the International Institute Of Public Finance Meetings on August 28th, 1989 examines the desirability and feasibility of introducing a financial transactions tax on all transactions to replace the present system of personal and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes.  This single comprehensive revenue neutral financial transaction tax is called the Automated Payment Transaction (APT) tax. In its simplest form, the APT tax consists of a flat tax levied on all transactions. The tax is automatically assessed and collected when transactions are settled through the electronic technology of the banking/ payments system. The APT tax introduces progressivity through the tax base rather than through the tax rate structure. The volume of financial transactions is highly skewed toward the wealthy, since they carry out a disproportionate share of total transactions and therefore bear a disproportionate burden of the tax despite its flat rate structure. The automated recording of all APT tax payments by firms and individuals creates a degree of transparency and perceived fairness that induces greater tax compliance. The tax also has the advantage of lower administrative and compliance cost. Like all taxes, the APT tax creates new distortions whose costs must be weighted against the benefits obtained by replacing the current tax system. Ideally, the financial transaction tax should be adopted worldwide in order to eliminate tax shifting and tax competition among nation states.
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This paper examines the desirability and feasibility of replacing the present system of personal and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes with a single comprehensive revenue... more
This paper examines the desirability and feasibility of replacing the present system of personal and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes with a single comprehensive revenue neutral Automated Payment Transaction (APT) tax.  In its simplest form, the APT tax consists of a flat tax levied on all transactions. The tax is automatically assessed and collected when transactions are settled through the electronic technology of the banking/ payments system.  The APT tax introduces progressivity through the tax base since the volume of final payments includes exchanges of titles to property and is therefore more highly skewed than the conventional income or consumption tax base. The wealthy carry out a disproportionate share of total transactions and therefore bear a disproportionate burden of the tax despite its flat rate structure. The automated recording of all APT tax payments by firms and individuals creates a degree of transparency and perceived fairness that induces greater tax compliance. Also, the tax has lower administrative and compliance cost. Like all taxes, the APT tax creates new distortions whose costs must be weighted against the benefits obtained by replacing the current tax system.
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This chapter examines the meaning and measurement of various underground economies and posits the growth of the unreported and unrecorded economies as a possible explanation of the empirical anomaly of stagflation during the 1970's.
This paper reviews the meaning and measurement of unobserved economies germane to tax evasion and macroeconomic information systems. These include the unreported, non-observed, underground, illegal, informal and unrecorded economies. It... more
This paper reviews the meaning and measurement of unobserved economies germane to tax evasion and macroeconomic information systems. These include the unreported, non-observed, underground, illegal, informal and unrecorded economies. It reviews the progress and shortcomings of national and international agency efforts to measure these unobserved economies, noting what they have in common, what distinguishes one from another and their interconnections. It then examines the meaning of Professor Schneider's Shadow Economy (SSE), and the veracity of his claim to have accurately estimated its size and trend worldwide by employing a MIMIC model methodology. It concludes that SSE estimates suffer from conceptual flaws, apparent manipulation of results and insufficient documentation for replication, questioning their place in the academic, policy and popular literature.
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Professor Schneider's " Comment " on my " Reflections " paper does not adequately address the key issues concerning the veracity of his findings, namely issues of documentation, normalization, calibration and replication. Further findings... more
Professor Schneider's " Comment " on my " Reflections " paper does not adequately address the key issues concerning the veracity of his findings, namely issues of documentation, normalization, calibration and replication. Further findings of inadequate documentation, suspicious normalization procedures, unexplained calibration errors and the inability to replicate the results; reinforces the conclusions of my original " Reflections " paper. Schneider's Shadow Economy results suffer from conceptual flaws, arbitrary data manipulations and insufficient documentation for replication, questioning their place in the academic, policy and popular literature.
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This paper examines why some transitions are more successful than others by focusing attention on the role of productive, protective and predatory behaviors from the perspective of the new institutional economics. Many transition... more
This paper examines why some transitions are more successful than others by focusing attention on the role of productive, protective and predatory behaviors from the perspective of the new institutional economics. Many transition economies are characterized by a fundamental inconsistency between formal and informal institutions. When formal and informal rules clash, noncompliant behaviors proliferate, among them, tax evasion, corruption, bribery, organized criminality, and theft of government property. These wealth redistributing protective and predatory behaviors activities absorb resources that could otherwise be used for wealth production resulting in huge transition costs. Noncompliant behaviors-evasion, avoidance, circumvention, abuse, and/or corruption of institutional rules-comprise what we can be termed underground economies. A variety of underground economies can be differentiated according to the types of rules violated by the noncompliant behaviors. The focus of the new institutional economics is on the consequences of institutions-the rules that structure and constrain economic activity-for economic outcomes. Underground economics is concerned with instances in which the rules are evaded, circumvented, and violated. It seeks to determine the conditions likely to foster rule violations, and to understand the various consequences of noncompliance with institutional rules. Noncompliance with 'bad" rules may actually foster development whereas non compliance with "good" rules will hinder development. Since rules differ, both the nature and consequences of rule violations will therefore depend on the particular rules violated. Institutional economics and underground economics are therefore highly complementary. The former examines the rules of the game, the latter the strategic responses of individuals and organizations to those rules. Economic performance depends on both the nature of the rules and the extent of compliance with them. Institutions therefore do affect economic performance, but it is not always obvious which institutional rules dominate. Where formal and informal institutions are coherent and consistent, the incentives produced by the formal rules will affect economic outcomes. Under these circumstances, the rule of law typically secures property rights, reduces uncertainty, and lowers transaction costs. In regimes of discretionary authority where formal institutions conflict with informal norms, noncompliance with the formal rules becomes pervasive, and underground economic activity is consequential for economic outcomes. JEL classification: P2 O17 P14 H2 H3 K4 O5 H26
A taxonomy of underground economies is elaborated based on the new institutional approach to economic development. Members of formal sectors confront different sets of transformation and transaction costs than do members of informal... more
A taxonomy of underground economies is elaborated based on the new institutional approach to economic development. Members of formal sectors confront different sets of transformation and transaction costs than do members of informal sectors and these differences are regarded as crucial to the development process. The paper distinguishes illegal, unreported, unrecorded and informal economies and examines the conceptual and empirical linkages among them. Alternative micro and macro methodologies for measuring underground activities are reviewed and evaluated including census and survey procedures, discrepancies and monetary methods. To be published in World Development, Vol 18, No 7, 1990.
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The “underground economy” literature has generated a plethora of vague terms (shadow, hidden, subterranean) that have served to confuse rather than clarify the substantive issues raised by the finding that significant segments of economic... more
The “underground economy” literature has generated a plethora of vague terms (shadow, hidden, subterranean) that have served to confuse rather than clarify the substantive issues raised by the finding that significant segments of economic activity may be imperfectly accounted for in the conventional data bases that form the foundation of empirical inquiry in economics. This paper outlines a taxonomic framework that clarifies the distinction between “unrecorded” and “unreported” economic activities and examines the appropriate empirical counterparts of these concepts. All too often, the under-recording of income in National Income and Product Accounts has been confused with the underreporting of income on tax forms.  The concept of a “full compliance deficit” is introduced in order to distinguish between structural, cyclical and compliance components of budget deficit measures.
Despite financial innovations that have created important new substitutes for cash usage, per capita holdings of U.S. currency amount to $2950. Yet American households and businesses admit to holding only 15 percent of the currency stock,... more
Despite financial innovations that have created important new substitutes for cash usage, per capita holdings of U.S. currency amount to $2950. Yet American households and businesses admit to holding only 15 percent of the currency stock, leaving the whereabouts of 85 percent unknown. Some fraction of this unaccounted for currency is held abroad (the dollarization hypothesis) and some is held domestically undeclared, as a store of value and a medium of exchange for transactions involving the production and distribution of illegal goods and services, and for transactions earning income that is not reported to the IRS (the underground economy hypothesis). We find that the percentage of U.S. currency currently held overseas is between 30-37 percent rather than the widely cited figure of 65 percent. This finding is based on the official Federal Reserve/Bureau of Economic Analysis data which is a proxy measure of the New York Federal Reserve’s (NYB) “confidential” data on wholesale currency shipments abroad. We recommend that the NYB data be aggregated so as to circumvent confidentiality concerns, and be made readily available in order to shed greater light on the question of how much U.S. currency is abroad while providing important information on the location of overseas U.S. dollars. The newly revised official estimates of overseas currency holdings are employed to determine the Federal Reserve’s seigniorage earnings from 1964-2010, which have provided a $185 billion windfall for U.S. taxpayers. Overseas currency stock data are also used to derive estimates of the domestically held stock of currency as well as narrow and broad measures of domestic monetary aggregates. These domestic monetary aggregates are believed to be better predictors of future economic activity than traditional monetary aggregates and are tested to determine their ability to predict fluctuations in real output and prices. Domestic cash holdings are finally used to estimate the size of the U.S. fiscal underground economy as measured by the amount of income that is not properly reported to the IRS. By 2010, “unreported income” approached $2 trillion, implying a “tax gap” in the range of $430- $475 billion. Currently, we estimate that 18-19 percent of total reportable income is not properly reported to the IRS.


Forthcoming in Crime, Law and Social Change.

Keywords: Overseas currency, currency abroad, underground economy; unreported economy; tax gap; tax evasion; cash payments; monetary aggregates.

JEL Classifications: E26; H26; O17; E41; E52
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This study empirically investigates the extent of noncompliance with the tax code and examines the determinants of federal income tax evasion in the U.S. Employing a refined version of Feige’s (1986; 1989) General Currency Ratio (GCR)... more
This study empirically investigates the extent of noncompliance with the tax code and examines the determinants of federal income tax evasion in the U.S.  Employing a refined version of Feige’s (1986; 1989) General Currency Ratio (GCR) model to estimate a time series of unreported income as our measure of tax evasion,  we find that 18-23 % of total reportable income may not properly be reported to the IRS.  This gives rise to a 2009 “tax gap” in the range of $390-$537 billion. As regards the determinants of tax noncompliance, we find that federal income tax evasion is an increasing function of the average effective federal income tax rate, the unemployment rate, the nominal interest rate, and per capita real GDP, and a decreasing function of the IRS audit rate. Despite important refinements of the traditional currency ratio approach for estimating the aggregate size and growth of unreported economies, we conclude that the sensitivity of the results to different benchmarks, imperfect data sources and alternative specifying assumptions precludes obtaining results of sufficient accuracy and reliability to serve as effective policy guides.


Reference: Crime, Law and Social Change (2012) Vol.57 No.3 pp. 265-285
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This paper summarizes the results of a research project investigating the size, growth and implications of Sweden's underground economy. Citation: Feige, Edgar L. (1986) Sweden's Underground Economy. IUI Working Paper 161 Provided in... more
This paper summarizes the results of a research project investigating the size, growth and implications of Sweden's underground economy.
Citation: Feige, Edgar L. (1986) Sweden's Underground Economy. IUI Working Paper 161
Provided in Cooperation with:
Research Institute of Industrial Economics (IFN), Stockholm
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This paper examines alternative specifications of a general currency ratio (GCR)model used to obtain macroeconomic estimates of the size and growth of the 'underground economy'. Tanzi's approach to estimating the underground economy is... more
This paper examines alternative specifications of a general currency ratio (GCR)model used to obtain macroeconomic estimates of the size and growth of the 'underground economy'. Tanzi's approach to estimating the underground economy is shown to be a variation of the GCR model. However both his conceptual specification and his empirical implementation of the model are shown to flawed, leading to significant underestimation of the size and growth of unreported income in the US economy. The paper appears in the International Monetary Fund Staff Papers, Vol. 33 No. 4 December, 1986
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A vast array of information about economic activity, political behavior and social trends are summarized in quantitative measures, sometimes in a single number such as GDP. Because of their apparent objectivity, simplicity and... more
A vast array of information about economic activity, political behavior and social trends are summarized in quantitative measures, sometimes in a single number such as GDP. Because of their apparent objectivity, simplicity and universality, these measures are used as a basis for both scientific investigations and in the formulation of public policy. These critical ‘facts” are often subject to what we call observer-subject- policy feedback, an interactive mechanism that can seriously distort and bias the economic, social and political indicators that are typically treated as exogenous observations on our complex systems. In fact, information is often endogenous to the system being studied, and a failure to recognize the observer-subject-policymaker feedback mechanism can result in “rational” decisions being based on ‘irrational” information systems. Indeed, we argue that the information content of social indicators is likely to become distorted by the very operation of the economic, social and political institutions they seek to describe. The unobserved economy is an exemplar of this interactive process. Reference: The Underground Economies: Tax Evasion and Information Distortion. Edgar L. Feige (ed.) Cambridge University Press, 1989.
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This paper elaborates the Unobserved Income Hypothesis as an explanation of various anomalies observed in macroeconomics. The paper was presented at the International Symposium on Taxation held in Vancouver, British Columbia, Canada on... more
This paper elaborates the Unobserved Income Hypothesis as an explanation of various anomalies observed in macroeconomics.
The paper was presented at the International Symposium on Taxation held in Vancouver, British Columbia, Canada on August 27-29, 1980.
The appropriate citation for the publication is “Macroeconomics and the Unobserved Economy” in W. Block and Walker. M eds. Taxation: An International Perspective, The Fraser Institute, 1984
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This paper examines why some transitions are more successful than others by focusing attention on the role of productive, protective and predatory behaviors from the perspective of the new institutional economics. Many transition... more
This paper examines why some transitions are more successful than others by focusing attention on the role of productive, protective and predatory behaviors from the perspective of the new institutional economics. Many transition economies are characterized by a fundamental inconsistency between formal and informal institutions. When formal and informal rules clash, noncompliant behaviors proliferate, among them, tax evasion, corruption, bribery, organized criminality, and theft of government property. These wealth redistributing protective and predatory behaviors activities absorb resources that could otherwise be used for wealth production resulting in huge transition costs. Noncompliant behaviors--evasion, avoidance, circumvention, abuse, and/or corruption of institutional rules--comprise what we can be termed underground economies. A variety of underground economies can be differentiated according to the types of rules violated by the noncompliant behaviors. The focus of the new institutional economics is on the consequences of institutions--the rules that structure and constrain economic activity--for economic outcomes. Underground economics is concerned with instances in which the rules are evaded, circumvented, and violated. It seeks to determine the conditions likely to foster rule violations, and to understand the various consequences of noncompliance with institutional rules. Noncompliance with ‘bad” rules may actually foster development whereas non compliance with “good” rules will hinder development. Since rules differ, both the nature and consequences of rule violations will therefore depend on the particular rules violated. Institutional economics and underground economics are therefore highly complementary. The former examines the rules of the game, the latter the strategic responses of individuals and organizations to those rules. Economic performance depends on both the nature of the rules and the extent of compliance with them. Institutions therefore do affect economic performance, but it is not always obvious which institutional rules dominate. Where formal and informal institutions are coherent and consistent, the incentives produced by the formal rules will affect economic outcomes. Under these circumstances, the rule of law typically secures property rights, reduces uncertainty, and lowers transaction costs. In regimes of discretionary authority where formal institutions conflict with informal norms, noncompliance with the formal rules becomes pervasive, and underground economic activity is consequential for economic outcomes.
In Transforming Post-Communist Political Economies, J. Nelson, C. Tilly and L. Walker eds. National Academy Press , Washington D.C. 1997
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This paper compiles alternative estimates of underground economies in twenty five transition countries during the transition decade and finds a disturbing lack of convergence between them, calling into question the reliability of GDP... more
This paper compiles alternative estimates of underground economies in twenty five transition countries during the transition
decade and finds a disturbing lack of convergence between them, calling into question the reliability of GDP figures (which in
varying degrees now include non-transparent imputations for the “non-observed economy”) as well as the macro model estimates
of the unrecorded economy. A corollary of this finding is that substantive results from many studies examining the consequences of
the radical transition from planned to market economies must be viewed with considerable skepticism. Underground (unobserved,
non-observed, unrecorded) economic activities play a major role in transition economies. Evaluations of the success and failure
of the transition experience should be based on estimates of total economic activity (TEA), namely, recorded plus unrecorded
economic activity. We examine the conceptual and empirical relationships between new National Income and Product Accounts
(NIPA) methods for obtaining “exhaustive” measures of total economic activity and the two most popular macro-model approaches
(electric consumption and currency ratio models) for estimating the size and growth of the unrecorded sector. Our updated empirical
results detailing the size and trajectory of unrecorded activities obtained from different estimation methods reveal a disturbing lack
of convergence. Until these important differences are resolved, investigations of the relationship between economic reforms and
economic outcomes during the transition decade must be viewed with considerable caution. Given the shortcomings of conventional
macro model estimates of the underground economy and the lack of transparency and consistency of NOE estimates, it is high time
that the profession acknowledges how little we really know about underground economies and their causes and consequences.
This paper develops a demographic model of the currency population by examining the birth and death rates of specific denominations of currency. This framework permits empirical estimation of the average lifetime of notes in circulation... more
This paper develops a demographic model of the currency population by examining the birth and death rates of specific denominations of currency. This framework permits empirical estimation of the average lifetime of notes in circulation and hence the currency velocity (turnovers per year) of each denomination. The velocity of currency times the stock of currency produces estimates of the annual volume of cash payments. Since the volume of check payments (debits to checkable accounts) is regularly recorded, our estimates of cash payments can be used to estimate the total volume of transactions (MV) from the payment side of Fisher’s equation of exchange. The paper goes on to examine the “currency enigma” from the perspective of both “missing currency” and “missing payments”. The estimated volume of cash payments is so high when compared to personal consumption expenditures, that one is led to the conclusion that a large fraction of the US currency supply is held abroad, and that there is a sizable underground (unreported and perhaps unrecorded) economy in the United States.
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Abstract The rapid growth of substitutes for cash, particularly debit and credit cards, has led economists to predict the advent of the “cashless society”. Yet cash holdings in most developed economies continue to grow and in the U.S.,... more
Abstract
The rapid growth of substitutes for cash, particularly debit and credit cards, has led economists to predict the advent of the “cashless society”.  Yet cash holdings in most developed economies continue to grow and in the U.S., per capita currency holdings now amount to $3000. This paper revisits the long-standing controversy concerning the whereabouts of U.S. cash. Specifically, we employ a previously confidential data source on net shipments of U.S. currency abroad to re-estimate the fraction of U.S. currency held overseas. Contrary to the widely cited figure that 65 percent of U.S. currency is abroad, we now find that direct evidence supports the notion that overseas holdings amount to less than 25 percent.
Currently, the official figure for the percent of U.S. currency held abroad as published by the Federal Reserve in their Flow of Funds Accounts and by the Bureau of Economic Analysis in the U.S. Balance of Payments Accounts is 37 percent. This official figure is based on a proxy variable that is supposed to mimic the previously confidential data series maintained by the New York Federal Reserve. Judson (2012) made this series public enabling us to discover that the official estimates of currency abroad require downward revision to reflect accurately the newly released data on actual cash shipments abroad.
We also review the “indirect” approaches to estimating the fraction of currency overseas employed by Porter and Judson (1996) and Judson (2012). We find that these indirect methods to be innovative but deeply flawed due to violations of their restrictive assumptions. Moreover, sensitivity analysis reveals the estimates highly sensitive to alternative specifying assumptions.
The paper also examines the temporal pattern of overseas holdings of U.S. currency and finds that the observed decline in the demand for U.S cash abroad coincides with the growing popularity of the Euro and its growth as a second currency held outside the Euro area between 2003 and 2008. These new findings have significant implications for estimating the domestic money supply and other domestic monetary aggregates; for estimating the net benefits of seigniorage earnings of the Federal Reserve; for forecasting changes in output and prices and for estimating the amount of unreported income and tax evasion in the U.S.
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The thesis of this paper is that current journal editorial policy bearing on empirical literature puts an inordinate premium on the attainment of "statistically significant results," with the effect of contaminating our published... more
The thesis of this paper is that current journal editorial policy bearing on empirical literature puts an inordinate premium on the attainment of "statistically significant results," with the effect of contaminating our published literature with a proliferation of Type 1 errors. I suggest a change in journal editorial policy to shift the criterion for acceptance away from the production of statistically significant results, toward a criterion that rewards relevance of the proposed research and adequacy of design of the hypothesis-testing procedures. As a minimum standard, journal editors could explicitly publicize the necessity for full reporting of procedures and data and openly encourage the publication of "negative" findings.
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he Soviet Union and the nations of Eastern Europe are undergoing a historically unprecedented restructuring as they move inexorably from centrally planned economies toward market economies. This historic transition must be guided by a... more
he Soviet Union and the nations of Eastern Europe are undergoing a historically unprecedented restructuring as they move inexorably from centrally planned economies toward market economies. This historic transition must be guided by a coherent set of stabilization policies to reduce the threat of macroeconomic collapse and the threat of inflation. As a precursor to price liberalization, private property rights must be created, distributed and credibly enforced in order to ensure that these rights can be freely traded at market prices. The creation and distribution of property rights must find a balance between the competing goals of equity on the one hand and efficient governance structures on the other. Finally, provision must be made for a social safety net, sufficiently broad to minimize the short run burden of an inevitably costly adjustment process in order to avoid a crisis of constitutional authority. A program of “Socialist Privatization” is proposed as a political means of establishing market capitalism on the basis of an equitable distribution of wealth.
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In earlier papers on “Socialist privatization” Feige proposed a sequential set of stabilization, privatization and liberalization policies designed to provide the necessary, albeit not sufficient conditions, for a transition from a... more
In earlier papers on “Socialist privatization” Feige proposed a sequential set of stabilization, privatization and liberalization policies designed to provide the necessary, albeit not sufficient conditions, for a transition from a planned to a market economy. An important component of the proposed policy package was an equalitarian distribution of a portion of “state” wealth to private citizens by means of a voucher program whose aim was to establish a social safety net of private wealth composed of “citizen shares” to cushion the disruptions and lessen the hardships of the transition process. This paper estimates the value of the proposed “citizen shares” and finds that they would have provided a significant social safety net as well as a powerful incentive for Soviet citizens to support the reform program. The problem with the proposed voucher program was not that it provided too little incentive. The problem was that the government failed to provide the relevant information to the public and that government information was not likely to be viewed as credible by its citizens. Reference: Comparative Economic Studies. Vol. XXXII No. 3, Fall, 1990
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Despite financial innovations that have created important new substitutes for cash usage, per capita holdings of U.S. currency amount to $2950. Yet American households and businesses admit to holding only 15 percent of the currency stock,... more
Despite financial innovations that have created important new substitutes for cash usage, per capita holdings of U.S. currency amount to $2950. Yet American households and businesses admit to holding only 15 percent of the currency stock, leaving the whereabouts of 85 percent unknown. Some fraction of this unaccounted for currency is held abroad (the dollarization hypothesis) and some is held domestically undeclared, as a store of value and a medium of exchange for transactions involving the production and distribution of illegal goods and services, and for transactions earning income that is not reported to the IRS (the unreported  economy hypothesis).
We find that the percentage of U.S. currency currently held overseas is between 30-37 percent rather than the widely cited figure of 65 percent. This finding is based on the official Federal Reserve/Bureau of Economic Analysis data which is a proxy measure of the New York Federal Reserve’s (NYB) “confidential” data on wholesale currency shipments abroad. We recommend that the NYB data be aggregated so as to circumvent confidentiality concerns, and be made readily available to all researchers in order to shed greater light on the questions of how much U.S. currency is abroad and on the particular location of overseas U.S. dollars. 
The newly revised official estimates of overseas currency holdings are employed to determine the Federal Reserve’s seigniorage earnings from 1964-2010, which have provided a $287 billion windfall for U.S. taxpayers.  Overseas currency stock data are also used to derive estimates of the domestically held stock of currency as well as narrow and broad measures of domestic monetary aggregates. These domestic monetary aggregates are believed to be better predictors of future economic activity than traditional monetary aggregates and are tested to determine their ability to predict fluctuations in real output and prices.
Domestic cash holdings are finally used to estimate the size of the U.S. unreported economy as measured by the amount of income that is not properly reported to the IRS. By 2010, we estimate that legal and illegal source unreported income” is $1.9 - $2.4 trillion, implying a “tax gap” in the range of $400- $540 billion. Currently, we estimate that 18-23 percent of total reportable income is not properly reported to the IRS. 

      Reference: Crime, Law and Social Change, (2012) Vol. 57 No. 3 pp.239-263
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We examine the extent, causes and consequences of the use of foreign currency as a co-circulating medium of exchange and store of value in Latin America. Using new estimates of the amount of foreign currency in circulation in the form of... more
We examine the extent, causes and consequences of the use of foreign currency as a co-circulating medium of exchange and store of value in Latin America. Using new estimates of the amount of foreign currency in circulation in the form of US dollars, we obtain unique measures of currency substitution, asset substitution, dollarization, and bank credibility for many Latin American countries. We also specify and estimate demand functions for foreign currency in circulation in Argentina in order to examine the dynamic consequences of network externalities for hysteresis and irreversibility.
Despite financial innovations that have created important new substitutes for cash usage, holdings of U.S. currency continue to grow and now amount to $3000 per capita, facts, refuting predictions of the advent of the “cashless society”.... more
Despite financial innovations that have created important new substitutes for cash usage, holdings of U.S. currency continue to grow and now amount to $3000 per capita, facts, refuting predictions of the advent of the “cashless society”.  Explaining the whereabouts of the surprisingly large quantity of U.S. cash in circulation with the public gives rise to the “currency enigma”.  American households and businesses admit to holding only 15 percent of the stock of outstanding currency. Overseas holdings of U.S cash account for some fraction of the stock outstanding.  The rest is held domestically as an undeclared store of value or as a medium of exchange for transactions involving the production and distribution of prohibited goods and services, (the illegal economy) and for transactions, earning income that is not properly reported to the Internal Revenue Service, the “unreported economy”. A critical empirical question is “What fraction of U.S. currency is held abroad?”
Porter and Judson (1996) employing “indirect” methods claimed that “between 55 percent and 70 percent of the U.S. currency stock is currently held outside the country”, whereas the “official” Federal Reserve figure published in it’s Flow of Funds (FOF) accounts puts the estimate at 37 percent abroad at the end of 2010.  The Federal Reserve obtains its published estimates using a proxy for a confidential data series collected by the New York Federal Reserve Bank of bulk shipments of U.S. currency by wholesale currency dealers into and out of the U.S.  Judson (2012) recently published these confidential aggregate shipment data, enabling a reexamination of the veracity of the “official” Federal Reserve Flow of Funds estimates of currency held abroad. We find that the FOF published proxy tracks the previously confidential shipment data closely between 1988 and 2001. Thereafter, the proxy begins to overstate the series it is supposed to mimic.  Taking account of the direct net bulk currency shipments abroad reported to the New York Fed as well as additional channels by which currency can flow into or out of the U.S such as immigrant remittances and travel, we find that by 2012 roughly 25 percent of U.S. currency is abroad. We strongly urge the Federal Reserve to come to some agreement concerning the amount of currency held abroad so that the current discrepancies between their published data, their internal data and their public pronouncements can finally be put to rest.
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This paper develops a demographic model of the currency population by examining the birth and death rates of specific denominations of currency. This framework permits empirical estimation of the average lifetime of notes in circulation... more
This paper develops a demographic model of the currency population by examining the birth and death rates of specific denominations of currency. This framework permits empirical estimation of the average lifetime of notes in circulation and hence the currency velocity (turnovers per year) of each denomination. The velocity of currency times the stock of currency produces estimates of the annual volume of cash payments. Since the volume of check payments (debits to checkable accounts) is regularly recorded, our estimates of cash payments can be used to estimate the total volume of transactions (MV) from the payment side of Fisher’s equation of exchange. The paper goes on to examine the “currency enigma” from the perspective of both “missing currency” and “missing payments”. The estimated volume of cash payments is so high when compared to personal consumption expenditures, that one is led to the conclusion that a large fraction of the US currency supply is held abroad, and that there is a sizable underground (unreported and perhaps unrecorded) economy in the United States.
Research Interests:
This paper analyses the problem of natural resource scarcity and its implications for economic development and international cooperation. We examine the meaning and measurement of resource “scarcity” and its implications for economic... more
This paper analyses the problem of natural resource scarcity and its implications for economic development and international cooperation. We examine the meaning and measurement of resource “scarcity” and its implications for economic growth and development. The paper describes the conditions required for the efficient use of exhaustible natural resources and for optimal inter-temporal efficient paths and considers the consequences of uncertainty, risk, externalities, disequilibria and institutional constraints on the market’s ability to achieve efficient resource utilization. Particular attention is paid to the implications of the cartelization of natural resource industries and the disturbing tendency to use political rather than economic motivations as the basis for resource production and distribution decisions.
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We have suggested a generalization of the Employment - Population (E-P) ratio approach to the unobserved economy that takes account of possible changes in average hours and changes in the sectoral composition of the labor force. Taking... more
We have suggested a generalization of the Employment - Population (E-P) ratio approach to the unobserved economy that takes account of possible changes in average hours and changes in the sectoral composition of the labor force. Taking account of these factors gives stronger evidence for a relative rise in the hidden economy after 1968 than Denison found using the E-P ratio. Building in the effects of disproportionately high levels of hidden income for proprietors, the self-employed and farmers would further strengthen the evidence for a growing unobserved sector. We have not addressed this issue. While we can obtain plausibility ranges on the size of the unobserved sector from our approach, it is unlikely that accurate measures for the values of unobserved hours can be developed. One advantage of the financial ratios approach is that it does not require survey respondents to incriminate themselves for accurate results.