Blogs & Comment

How big is Canada’s underground economy? $42 billion

About 2.3% of Canada’s business is conducted off the books. It undermines trust, as well as the tax system

Handshake with bribe

(Amanda Rohde/Getty)

Statistics Canada recently released this report on the underground economy in Canada—essentially an attempt to gauge the extent of “market-based economic activities, whether legal or illegal, that escape measurement because of their hidden, illegal or informal nature.”

The report’s key finding: “In 2012, total underground activity was $42.4 billion in Canada or about 2.3% of gross domestic product.”

The residential construction industry is the key culprit, accounting for 28.3% of the total. In other words, lots of people are having home renovations done, paying cash, and the contractors aren’t charging—or forking over to government—the required taxes.

The government’s concern, of course, is not merely with measuring the extent of the underground economy. Market activities that “escape measurement” because of their “hidden, illegal or informal nature” are not just unmeasured, but untaxed. So the missing $42.4 billion means a lot of forgone tax revenue.

Ethically, this is not good. Contractors (for example) who don’t charge the required taxes are not competing fairly. And consumers who are complicit in such tax avoidance aren’t paying their fair share of the national tax burden; they are, to use the standard mass transit metaphor, “free riders,” letting the rest of us pay to support the tax-funded services that we all enjoy.

Part of the problem, naturally, is that those who engage in “underground” transactions may tell themselves that it’s a victimless crime. But that’s simply false. If you don’t pay your share, you’re not stealing from the government—you’re stealing from the rest of us.

Naturally, some will blame the tax system. Taxes are too high, they’ll say. Or the tax system is too complicated. Fair enough: if that’s your view, work to change the system. Go vote. Write your MP. I realize none of that is guaranteed to get results. But if you break the law in order to protest it, you should at least do it openly. Anything else requires an awful lot of self-serving rationalization. The fact that you feel like you’re already paying too much doesn’t mean that you actually are.

Of course, we needn’t be entirely sanctimonious about this either. Consumers, for their part, can’t plausibly be expected to enquire, for every cash transaction, whether the business involved is paying its taxes. And there’s room for sympathy—always—for those on the bottom rungs of the economic ladder. If you’re living below the poverty line and cutting lawns or babysitting to make ends meet, I have some sympathy for playing fast and loose with the tax rules. But then, that same justification doesn’t apply to the upper-middle-class household paying under the table to have a deck built on the back of their suburban house.

Finally, it’s worth noting the upside, the good news implied by the fact that a bunch of people aren’t actually paying their share. The upside is this: if a bunch of people are getting away with not paying their share, it means we don’t live in an utterly repressive totalitarian state. Consider what it would take to reduce the underground economy to zero: that kind of government intrusion into our lives would be unbearable.

So, the fact that some people get away with it is a good thing. But the impulse to do it—the impulse to avoid paying your share—is not.