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Off the Books and Underground

Guest post by: Nelson Davis

Article Overview: Some years ago while taking a walking tour in downtown Los Angeles, the tour guide waved his hand at a commercial strip on Broadway and said something that stayed in my mind. “More cash changes hands every Saturday on this street than in Beverly Hills” was his observation. Notice he said cash and not higher gross sales. There is an unmeasured segment of the small business community that seems to be growing, especially in urban areas. It is a world where cash is not just King, but the entire royal court! Politicians and regulators need to absorb the lessons coming from the off-the-books economy.

Off the Books and Underground

Some years ago while taking a walking tour in downtown Los Angeles, the tour guide waved his hand at a commercial strip on Broadway and said something that stayed in my mind. “More cash changes hands every Saturday on this street than in Beverly Hills” was his observation. Notice he said cash and not higher gross sales. There is an unmeasured segment of the small business community that seems to be growing, especially in urban areas. It is a world where cash is not just King, but the entire royal court! Politicians and regulators need to absorb the lessons coming from the off-the-books economy.

We’ve all heard the term “underground economy” which refers to individuals and businesses that deal in cash and/or use other methods to conceal their business cash flow. In doing so, they avoid their true tax liability, government licensing, regulatory and taxing agencies. It also is referred to as the shadow economy, cash pay, off -the-books, and payments under-the-table. Here in California the Franchise Tax Board and the Board of Equalization estimate that the underground economy handles between $60 billion and $140 billion per year.

It is pretty common to have a handy-man say that the handiest way to pay him is in cash and for that transaction, the rate will be a bit lower. If you’ve ever worked as a restaurant server, it is not very likely that you’ve reported every dollar that was tipped your way. I think that every business owner has dreamed of pocketing more of the proceeds. Some of us resent all taxes while others are simply unhappy with how our forced contributions are spent by various governments. In my dream state, I get to swap jobs with a legislator for a month! They fill out forms in my business and I get to cut the number of forms a business owner has to fill out.

Without debating the moral issues around the shadow economy, there can be simple business reasons for working with cash. The upside for very small and startup businesses is that you can get going without having to pony up fifteen to thirty percent of your income to city, state and federal partners while you struggle to get off the ground. Of course this sword has another edge to it. To apply for a bank loan or other forms of borrowing, you need to have an accurate accounting of what’s been going on in your business life. A stack of receipts in a shoe box will not charm your bank or credit union. Even your cousin would have second thoughts about loaning you money if you couldn’t show him records of income and expenses.

In Southern California, I’m fascinated by another interesting, non-scientific aspect to the underground economy. We have heavy immigrant populations from Latin America, the Middle East and Asia. It is very common in their cultures to operate business on a cash basis. Have you ever made a great deal in a marketplace in Iraq using a credit card? Magic carpets probably fly better fueled by dollars or the dinar. In some countries including European nations (Greece anyone?) avoiding taxes is just behind Soccer as a national passion. Many small shop owners from those countries don’t trust banks or the government. Some years ago my company videotaped a story at a substantial food distribution business in Los Angeles’ Chinatown where the owner used an abacus because he didn’t yet trust his computer skills.

At the center of the entrepreneurial spirit in all nations is the amazing ability of human beings to adapt to quickly changing circumstances and to survive all manner of threats and roadblocks. City, state and federal governments seem to forget this as they go about building a layer cake of fees, taxes and regulations for business activities even including micro enterprises. There is a vanishing point for taxes beyond which there can’t be any increase in actual revenues. In our country, finding loopholes and walking through them is its own business category. If doing business above ground is too troublesome and strewn with obstacles, the underground economy gains a new recruit. A stack of dollars always feels more satisfying than a stack of forms that need to be filled out.

I believe at least two things about money. One is that it behaves like water, gathering in pools where it is made to feel safe and welcome. The other is that money never disappears (unless it is burned or melted) but simply moves to someone else’s purse. The underground economy plays a role in both principles. The person with a successful business on or off the books has created a comfortable place for dollars to gather, commune with each other and perhaps even generate more dollars. Sometimes we have to ignore the “poor me” noises made by people in City Hall who say things like “The NBA players lockout has cost the city millions of dollars.” No, the money simply wasn’t spent at Staples Center or the nearby businesses but at other places by other hands, and some of them were perhaps in the shadows or underground.

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Article Tags: accounting, Board of Equalization, cash pay, Franchise Tax Board, government licensing, off the books, shadow economy, small business, startup business, tax liability, taxing agencies, underground economy, underthetable



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