reasons why individuals engaged in underground economy?

Answer 1

If you are engaged in a legal activity, the objective is to avoid income taxes, getting business licenses, etc. If it is an illegal activity, then you are trying to avoid those things plus the law!

Economists think of it this way. There is some probability of getting caught -- call that "p". There are huge costs associated with getting caught -- jail time, paying back taxes plus fines, etc. Call those costs "C". There are also benefits of avoiding taxes by going underground. Let's call those benefits "B".

As long as p*C is less than B, the person will engage in the underground economy. That is, as long as the expected costs of getting caught are less than the benefits, then go for it!

Answer 2

This is because in the underground economy, shadow economy, or black economy which consists of all commerce on which applicable taxes are being evaded,its market includes not only legally-prohibited commerce (for example, drugs, prostitution, and gambling activities that are illegal in some locales), but also trade in legal goods and services because some income is not reported and consequently taxation is evaded, e.g., through money laundering, payment in cash (which can almost never be traced), or other means.

The underground economy also includes transactions that governments may allow to be free of taxation, either by legal sanction or by simply choosing to refrain from enforcement of tax laws in certain markets. The term underground economy typically is not used to refer to trade in stolen goods, which may more appropriately fall under the definition of the "black market".

Underground economy transactions are typically cash transactions to evade traceability by governments or complex financial operations involving the use of multiple subsidiaries and tax havens.

The Clearstream scandal is an example of such tax evasion. Based in Luxembourg, Clearstream practices financial clearing, which means it centralizes operations of multiple banks, some based in tax havens.

Marijuana, pornography and illegal labour have created an underground economy in the United States which now accounts for as much as 10% of the American economy, according to a study.[1] Some estimates of the size of the underground economy in the U.S. alone range to up to $1 trillion.

Measurement of the size of the underground economy is subject to a large margin of error. Economists seeking to measure its size have often looked at the volume of cash in circulation, although a large part of the underground economy takes place via bank accounts located in tax havens. Discrepancies between the growth of officially reported spending (GDP) and the growth of cash in circulation may be used to infer growth in the size of the underground economy, but these estimates are subject to a considerable amount of judgement, and are controversial.

In some countries such as Macedonia, The Black Economy is so strong, that it stopped Macedonia going bankrupt. If Macedonia had to rely on its own official economy, it would have gone bankrupt long ago. Almost as soon as tax was introduced, people tried to evade it and over time this was called The Black Market. Because people try getting around paying Tax, it means that they are using services like police, without paying for them.[citation needed]

The growth of online commerce may have increased the size of the underground economy. eBay has over 40 million regular users, including international users. The sellers are legally responsible to pay taxes[2]. However, there is no report on how many actually do, and government rarely if ever intervenes to ensure that they do.

The underground economy, when trading decisions are not the result of coercion, is arguably a free market, since, by definition, it lacks government intervention. However, various governments have engaged themselves in the underground economy, thus blurring the line between public intervention and its absence.

Answer 3

There are two main reasons not to report or expose economic activity: 1)because the activity is illegal i.e. selling drugs, prostitution, etc. and 2) to avoid taxes(even if the activity is legal). Big areas her include child care providers, landscapers, construction and folks who have skills they can provide for "cash" and then not deposit or report these funds in any way.