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The Shadow Recovery

NEW YORK (TheStreet) -- After becoming an LLC recently, I began paying myself a salary.

I took a $2,000/month draw. Not much, but enough to pay the mortgage and some utility bills. Then I visited EFTPS.Gov, which offers a convenient way for employers (like myself) to pay taxes regularly on employees (like myself).

Turns out the federal tax on that draw comes to $959. Add an expected tax rate of 25% to both employer and employee contributions to Social Security, 15.4%, plus both sides' contributions to Medicare, another 4.3%. Then there are going to be state income taxes, and a city "business tax" for me to pay later. Don't get me started on sales and property taxes.

In some ways I don't mind. Government provides necessary services -- soldiers and their equipment aren't cheap. Social Security has kept my mom going for a quarter-century now, and Medicare has saved her life more than once.

But when I see Apple (AAPL) and Google (GOOG) going to such great lengths to avoid taxes, when I see Warren Buffett paying less in tax than his secretary does, or Mitt Romney stashing his cash in the Caymans, it's discouraging.

So we have a shadow recovery.

A recent University of Wisconsin study indicated up to 19% of the U.S. economy is not being reported to the IRS, creating what it calls a $500 billion "tax gap."

The study, by Richard Cebula and Edward Feige, shows the shadow economy rising during recessions, falling during recoveries, until the last few years. Since 2009 it has flattened out, rather than going down.

There are lots of reasons. Some employers just hate government. They fear health cost mandates. They see the big boys avoiding taxes and figure they should do the same.


It's not just that the tax man is getting shortchanged. It also means economic models showing an anemic recovery may be wrong. Despite unemployment of near 8%, consumer spending remains strong, more in line with what it would be if unemployment were just 5.5%. Measures taken to improve employment may, in fact, no longer be necessary.

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