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justaguide eNotes educator| Certified Educator

The underground economy refers to the portion of the economy which generates income but for which the tax liability is not fulfilled. It is estimated that in the US around 10% of the taxable income is unreported. This can be either in the form of individuals reporting only a part of their income or entirely desisting from reporting any income.

There are several reasons for the existence and growth of the underground economy. One of the obvious causes of this is that the income earned is done through activities which are not allowed legally. Another is the high rates of income tax; people are not willing to give up such a large percentage of their hard-earned income. This especially happens when there is a lot of corruption and tax-payers see little benefits in their lives due to the revenue being collected by the government.

Some ways to reduce the size of the underground economy could be a reduction in tax rates, making it more difficult for people to use their income without it being noticed by the authorities, increasing transparency and reducing corruption.

pohnpei397 eNotes educator| Certified Educator

The term "underground economy" refers to a part of the economy where money is made but is not reported to the government.  This can include illegal activities such as drug dealing, but it can also include work where the activity itself is legal (day care, landscaping, etc) but where the people involved do not want to report their income to the government (because they don't want to pay taxes; because they are illegal immigrants; etc).

If an underground economy exists, it makes it hard for a government to know the exact size of its economy.  It also reduces the amount of tax revenues that a government takes in.  Finally, the existence of an underground economy can hurt legitimate businesses that compete with the underground ones.  Underground businesses tend to have lower costs and can often outcompete businesses that operate legally.

tripu | Student

Underground economy also known as black economy is basically illegal or untaxed income. In India only a small proportion of people that is less than 5% of population file their income tax return. Evading tax is common practice among educated urban middle class, the same is a status symbol in rural in India. People take pride in having a handsome income, lavish life style but not paying a single penny as tax.While the attitude of common man is biggest contributor to the black economy, even the legal system and government machinery is to blamed equally.

In India people never ask for a cash memo or invoice or any kind of receipt at grocery store, Gas station, taxi services, buying medicine, road side eateries, Shopping for cloth etc. All these transaction don't exist in the eyes of government and goes untaxed in the hands of receiver and payer.

In almost all the markets transactions takes place in cash, even in property market the dealer insist on making a sales deed at a price much lower than market price just to save on government duty and transfer fees and to avoid tax on income.

The Income tax department recovers millions from any person or corporate house where they could raid with a small team of executives.

That's the story of Indian underground economy.