What Uncle $am Doe$n't Know

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One doesn't have to look too far to see that economic forces over the past two years have been bearing down on consumers. Americans are shouldering the burden of sharp increases in healthcare, gas prices, tuition and real estate. What's more, published reports show job wages are not keeping up with these increases and debt levels are climbing. Yet, despite all of this, consumer spending is up. In fact, the Census revealed that retail and food services sales jumped 7.7 percent from September 2003 to September 2004 and housing starts and new home sales continue to break records. So where is the money coming from?

In a June

American Demographics

article, called "A New Era of Cold Hard Cash," Peter Francese asserts that household income may not be as closely linked to taxable employment wages as it used to be. Instead, the article suggests consumers are generating income from nontraditional sources and during tax season they are keeping quiet about their spoils.

Already, the Bureau of Labor Statistics estimates that there are about 10 million workers in the U.S. who are self employed as their primary job and another 1.5 million who are self employed as a secondary job. Francese aptly asserts that self-employment will likely increase, as skilled, older workers (Baby Boomers) approach retirement.

Side jobs aren't the only way people are generating more spending money. In the spirit of garage sales and flea markets, online auction sites have succeeded because of their ability to bring together a global community of buyers and sellers, enabling consumers to empty out their closets, basements and attics for cash. Last year, the total value of items sold on eBay, for example, reached $24 billion, soaring 60 percent from the $15 billion reported in 2002.

"I wonder how much of that got reported. I would suspect that more than a little of the income from selling household items on eBay goes unreported," Francese told

American Demographics.

He adds the problem doesn't only exist on the Internet: "I live in a small town. Every weekend there are dozens of garage sales and I doubt any of that gets reported. Multiply that by the thousands of towns and cities across the country and it's got to be in the tens of billions of untaxed income."

American Demographics

and e-Poll partnered in a survey last month to test just how honest Americans are with the government about their off-the-radar income. e-Poll asked 1,206 respondents if they have ever neglected to record or report a cash transaction. We ensured respondents that names would be kept anonymous to elicit honest responses. We realize respondents have more of an incentive to lie to the government than to be honest with us for a random survey. So we knew the percentage of those admitting to tax evasion would likely skew lower than reality, but interestingly, 14.8 percent of respondents admitted to concealing income from the government. More than two-thirds, 69.4 percent, said "no" and 15.6 percent said they don't know.

According the to the survey, men are not as honest as women are. Out of 647 males, 18.3 percent of them confessed to concealing income from the government, 65.5 percent said "no" and 16 percent didn't know. Out of 559 female respondents, only 10.7 percent of them admitted to tax evasion, 74 percent said "no" and 15.2 percent don't know.

Among the respondents, the starkest contrast exists between low-income earners and high-income earners, with low-income earners concealing more from the government. For those who earn $25,000 or less, 22.3 percent admitted to tax evasion, 58.5 percent said "no" and 19 percent don't know. For those that earn more than $50,000, 12.3 percent admitted to tax evasion, 72.3 percent said "no" and 15.2 percent don't know. Of the respondents that earn between $25,000 and $49,000, 13.1 percent admitted to concealing the income, 72.8 said "no" and 13.9 don't know.

While more low-income earners admitted to tax evasion than high-income earners, Francese says, "even 12.3 percent [of $50,000-plus earners] is still very high." He's not surprised that a larger percentage of low-income workers conceal income from the government, because he says these employees often work for cash. "If you're making $60,000 a year in the form of a salary, it's difficult not to report that. Companies send out a W-2 to the IRS, so where's the secret? At the lower income level you have much more bartering going on."

The problem, he maintains, is that congressional leaders are not delivering the right message to the public. "What's driving this is the constant obsession about taxes by our national politicians. All they seem to be able to talk about is, 'we want you to keep more of your money.' So when they portray taxes as something you want to avoid, they shouldn't be terribly surprised when more people say 'I'm not going to pay my taxes.'"

However, the long-term ramification of tax evasion can be crippling for the U.S. economy, he warns. "Now, the more prevalent attitude is that we don't have to pay for our civilized society; as opposed to an attitude that says we're in a time of war and in a deficit and everyone should help our country out. When large factions of the population think they can get something for nothing that's a bad trend," Francese says ruefully. "The last century was our century, but you may be witnessing the decline of us as an economic world power.... Just look at the Roman era."

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