Welcome to the Black Market

Harris Kupperman
Lew Rockwell

A few years back, on a trip to some Third World nation, I remember asking a successful businessman why more small businesses are not public. His response was sublime. “I keep two sets of books – one for the government and a real one for myself. I am not showing anyone the real books. If I have shareholders, what will I show them? I will never get fair value for my business if I show them the fake numbers.” Welcome to the black market.

Let’s face it, no one enjoys paying taxes. In many countries, you have a bifurcation. Large companies can use their clout with the government to get special exemptions from various taxes and regulations. As long as the campaign contribution is smaller than the tax, most companies pay it. Smaller companies are less fortunate. They cannot afford protection and so they chose to operate more in the shadows. They do not report certain income and they over-report expenses. In some countries, this is so prevalent that it has become an “accepted” practice.

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.

Large companies can pay for lobbyist to protect them. Smaller companies are stuck. They can follow asinine rules, or they can ignore the rules. What do you think they will do? Currently in America, it’s better to be honest, but there is a tipping point. I’m scared that we are nearing that point in time, along with the consequences from it.

The more I travel, the more amazed I am at how compliant Americans seem to be when it comes to paying taxes. Many of us do not even use all our legitimate deductions. I think it comes down to a simple principle. Taxes are the cost of civilization and as Americans, we all understand that we must do our part. As long as we view our tax system as just, we grit our teeth and pay the tax. However, there does come a time when people begin to lose faith in the system and opt out. In many Third World countries, this is because the people resent paying money to corrupt politicians and stupid entitlement programs.

Read Full Article