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New estimates of overseas U.S. currency holdings, the Underground economy and the "Tax Gap"

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  • Feige, Edgar L.

Abstract

This paper examines the ‘currency enigma” which arises because despite financial innovation that has created important new substitutes for cash usage, U.S. per capita currency holdings now amount to $2700. American households and businesses admit to holding only 15 percent of the stock of currency outside of the banking system. Some fraction of unaccounted for currency is held overseas (the dollarization hypothesis) and some is held domestically undeclared, as a store of value and a medium of exchange for transactions involving the production and distribution of illegal goods and services, and for transactions involving incomes that are not reported to the IRS (the underground economy hypothesis). We first revisit the longstanding controversy concerning the fraction of U.S. currency held abroad and find that newly revised estimates of U.S. overseas currency stocks estimates the fraction overseas at 37 percent, rather than the widely cited figure of 65 percent. A more refined proxy places the fraction abroad closer to 30 percent. New estimates of overseas holdings permit calculation of domestic currency holdings, as well as narrow and broad measures of domestic monetary aggregates. These are tested to determine their ability to predict fluctuations in real output and prices. The domestic currency figures are then used to estimate the current amount of “unreported income” which approaches $2 trillion, implying a “tax gap” in 2008 of between $446- $490 billion.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 19564.

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Date of creation: Sep 2009
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Handle: RePEc:pra:mprapa:19564

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Related research

Keywords: Underground economy; unreported income; unobserved economy; tax gap; cash; overseas currency; monetary aggregates; output; inflation.;

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References

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  1. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Chapters, in: The Demand for Currency Relative to Total Money Supply, pages 1-37 National Bureau of Economic Research, Inc.
  2. Feige, Edgar L., 1997. "Revised estimates of the Underground Economy: Implications of US Currency held abroad," MPRA Paper 13805, University Library of Munich, Germany.
  3. Phillip Cagan, 1958. "The Demand for Currency Relative to the Total Money Supply," Journal of Political Economy, University of Chicago Press, vol. 66, pages 303.
  4. Feige, Edgar L & Pearce, Douglas K, 1979. "The Casual Causal Relationship between Money and Income: Some Caveats for Time Series Analysis," The Review of Economics and Statistics, MIT Press, vol. 61(4), pages 521-33, November.
  5. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Books, National Bureau of Economic Research, Inc, number caga58-1, October.
  6. Feige,Edgar L. (ed.), 1989. "The Underground Economies," Cambridge Books, Cambridge University Press, number 9780521262309.
  7. Case M. Sprenkle, 1993. "The Case of the Missing Currency," Journal of Economic Perspectives, American Economic Association, vol. 7(4), pages 175-184, Fall.
  8. Cebula, Richard J & Koch, James V & Paul, Chris, 1998. "Income Tax Rates and the Public's Attitude toward Government in the United States: A Brief Empirical Note," Public Finance = Finances publiques, , vol. 53(3-4), pages 495-98.
  9. Feige, Edgar L., 1989. "Currency Velocity and cash payments in the U.S. Economy: The Currency Enigma," MPRA Paper 13807, University Library of Munich, Germany.
  10. Cebula, Richard, 1996. "An Empirical Analysis of the Impact of Government Tax and Auditing Policies on the Size of the Underground Economy: The Case of the United States, 1973-94," MPRA Paper 49810, University Library of Munich, Germany.
  11. Robert B. Avery & Gregory E. Elliehausen & Arthur B. Kennickell & Paul A. Spindt, 1987. "Changes in the use of transaction accounts and cash from 1984 to 1986," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Mar, pages 179-196.
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Cited by:
  1. Feige, Edgar L. & Cebula, Richard, 2011. "America’s Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S," MPRA Paper 29672, University Library of Munich, Germany.

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  1. 地下経済 in Wikipedia Japanese ne '')
  2. Seigniorage in Wikipedia English ne '')
  3. Black market in Wikipedia English ne '')

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