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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.

Suggested Citation

  • Feige, Edgar L., 2009. "New estimates of overseas U.S. currency holdings, the Underground economy and the "Tax Gap"," MPRA Paper 19564, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:19564
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    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. Feige,Edgar L. (ed.), 1989. "The Underground Economies," Cambridge Books, Cambridge University Press, number 9780521262309, August.
    4. 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.
    5. Feige, Edgar L., 1997. "Revised estimates of the Underground Economy: Implications of US Currency held abroad," MPRA Paper 13805, University Library of Munich, Germany.
    6. 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 521-533, November.
    7. 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 495-498.
    8. 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.
    9. Case M. Sprenkle, 1993. "The Case of the Missing Currency," Journal of Economic Perspectives, American Economic Association, vol. 7(4), pages 175-184, Fall.
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    Cited by:

    1. Richard J. Cebula, 2014. "The underground economy in the U.S.A.: preliminary new evidence on the impact of income tax rates (and other factors) on aggregate tax evasion 1975-2008," PSL Quarterly Review, Economia civile, vol. 67(271), pages 451-481.
    2. Altmann, Markus & Bartzsch, Nikolaus, 2014. "The volume of euro coins held for transaction purposes in Germany," MPRA Paper 59542, University Library of Munich, Germany.
    3. 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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    More about this item

    Keywords

    Underground economy; unreported income; unobserved economy; tax gap; cash; overseas currency; monetary aggregates; output; inflation.;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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