A New Yorker story suggests that the federal government loses about $400 billion of taxation revenue a year to underreporting. As the story acknowledges, underreporting is encouraged not just by tax savings but by regulatory evasion. As regulatory burdens increase, and more and more employers and employees go off the books, it's "hard for businesses to play by the rules if their competitors aren't paying payroll taxes or workers' comp." One obvious solution: less regulation, and use the government resources that are no longer enforcing expensive regulation to instead enforce tax compliance. But as we add more regulation, a hidden cost of that regulation is not only the jobs destroyed, but the jobs that shift to the grey market to evade the costs of regulation, increasing the tax burden on the honest.
A hidden argument for deregulation
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