Today's Economic Mystery

NEW YORK ( TheStreet) -- Today's economy is a mystery to investors.

We're told unemployment is almost 8% and that growth is anemic. It's so bad the Fed keeps interest rates at zero and monetary stimulus flooding in.

Yet despite the sequester taking billions out of the economy, and despite the payroll tax hike taking out billions more, the stock market keeps rising, as do home prices and consumer confidence.

I had thought last month that the impact of austerity and of economic growth would cancel one another out, leaving us with an economic nothingburger. But what if I'm wrong because I don't have all the data? What if we're all wrong?

According to Edgar Feige, a professor emeritus at the University of Wisconsin, we are all wrong. He estimates that $2 trillion of our economic activity is now "underground," in what he calls the "gray economy," costing the government $500 billion in taxes each year. The official size of the economy is $15.7 trillion. According to Feige, it's closer to $18 trillion.

At Feige has proposed what he calls "The Automated Payment Transaction Tax" to capture this activity, and he says that if 0.35% of all electronic transactions went to the government, all other taxes could be eliminated.

According to The Transaction Tax, which advocates for Feige's proposal, this would mean that each time you pulled $100 out of an ATM, 35 cents would go to the government. It would make Visa ( V) and MasterCard ( MC) into our tax collectors. But you would have no more income tax, no more corporate taxes, no more sales taxes or property taxes. And no more forms to fill out.

Such a system might help companies repatriate some of the trillions of dollars in assets now thought to reside in tax havens like the Cayman Islands -- all without the necessity of an invasion, which I fantasized about last year.

The point is, tax avoidance doesn't just hurt the tax man. It hurts investors and policymakers, denying us the data we need to know what's going on in the real economy. Bernard Baumohl of the Economic Outlook Group told James Surowiecki of The New Yorker recently that retail sales are currently where they should be with unemployment at 5%-6%, not 7%-8%. The difference is the gray economy.

If you pay someone in cash, if you treat your workers as independent contractors, or if you just toss a few dollars on the bill when you eat out, you're participating in this gray economy. So are the people you give the money to.

It doesn't matter why you do this -- either because you can't get another job, or you think government payments and paperwork make it necessary -- it distorts our view of what's going on, and forces other, more honest people to pay your taxes.

As an investor, all this means that things are much brighter than they appear. It means the economic recovery is real and sustainable. But it also means we're becoming more like Greece: a nation of scofflaws.

How would you suggest we get a little law and order? That's the real economic mystery.

At the time of publication, the author had no investments in the companies mentioned here.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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