Hedgie and blogger Harris Kupperman has an excellent rant on his site Adventures in Capitalism on how and why black markets tend to form. Without getting overtly political, he makes the case that in countries where so much tax money is diverted to things that the payers don’t respect (outsized entitlements and corruption), the small business owners have no choice but to “opt out” of paying taxes entirely.
In many countries, avoiding taxes and stupid regulations is just part of doing business. How can you blame them? The danger is that this limits the ability of these companies to access the capital markets for debt and particularly for equity funding. Without growth capital, there is no growth in your economy. Even worse, many of these companies take their unreported profits and deposit them in overseas banks out of the reach of the taxing authority—which further stymies growth. No country wants to create a black market—it forms naturally out of desperation because of bad governance. Businessmen rarely want to do business in the shadows as there are hidden costs to this sort of business—however, sometimes they have no choice.
Unlike large corporations that can and do hire armies of lobbyists while shielding profits overseas away from tax collectors, small business owners simply begin wheeling and dealing in the shadows locally. Those who wish to continue to deal fairly and support the system find themselves at a competitive disadvantage when the black market runs rampant. Greece is an excellent example of this as we learned in the Michael Lewis Vanity Fair piece earlier this month.
This is important stuff to consider ahead of the November mid-terms. When 10% of the country is paying virtually all of the taxes, is there a tipping point in sight? When does the black market become the only viable option?
Hat tip to reader Peter F for passing on the link.