Question

Advantages of informal sector of economy

Answer 1

Answer:

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Explanation:

There are a number of advantages (and disadvantages) to the “informal” underground economy. How big is it?

Estimates vary because by its very nature it goes un-reported to the government so no statistics are kept. The IRS estimates it loses about $500 billion a year in tax revenues due to unreported wages. Assuming a 15% income tax rate and another 15% for FICA and Medicare taxes, that would be about $1.7 Trillion of unreported wages. Some economists estimate well over $2 Trillion.

The primary advantages are avoiding income taxes and mandated benefits for employees, but it’s also a way to bring more income into a household without losing welfare benefits. It’s not, as many believe, restricted primarily to the drug trade.

Any small business that sells a product or service for which payment is not deductible to the consumer can benefit by offering a discount for cash. Or, if convenient, accept a personal check that is cashed at the customer’s bank. As long as that revenue doesn’t pass through the small business bank account or the owner’s personal account, the IRS has no way to track it.

Barbers, gas station owners, car washes, home improvement businesses, etc., often report only what they’re paid by check or credit card, and put all cash payments in their pocket. No one knows what percent of cash tips earned by wait staff go unreported.

Gaming the system has become an American way of life, and it’s a much bigger part of the economy than most people realize.

The downside to this practice is that the “hidden income” can’t be used to qualify for a mortgage, nor does it apply to social security benefits. Much of Dodd-Frank and the Federal Anti-Money Laundering Statute has to do with ferreting-out unreported income. It’s one reason you can get a mortgage to buy a house using a “cash” down payment. If the IRS can’t document where the money came from, you can’t use it for a government-backed mortgage. We also have to document the source any deposits in your bank account (for the past 2–3 months) that don’t match up with your regular reported income. Banks are also required to report to the IRS any unusual cash deposits into your bank accounts, no longer limited to $10,000+.

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Answer 2

Answer:      Advantages of Informal Sector employment:

Some employers pay well because company owners do not have many tax obligations. Employee effort is directed towards achieving profit rather than satisfying irrelevant routines

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