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.

But the shadow recovery is unsustainable. When some are paying half their income in taxes, while others are being paid under-the-table and paying no taxes, or using offshore subsidiaries to evade taxes, those who follow the law become chumps.

It's not just nannies and waiters and drug dealers being paid under the table. Many friends of mine who once had jobs are now "freelancers," or "small businesspeople," and most aren't contributing to benefits that used to be a standard part of employment, like retirement and health care.

What it means is that the economy is much better than it seems, but that the social situation is also more fragile than it has been since the Great Depression. Now, when people get sick they will die. When people get old they will need relief. When people lose work they will starve. So will their children.

And when the shadow recovery turns into a shadow recession, public anger over disparities in wealth could create the same upheaval we saw 80 years ago, when some were outright Communists, others were frankly Fascists, and we wondered whether democracy and capitalism could survive.

I'd rather pay taxes than see that. If you read the personal histories of that time, as my mother lived them, you would too.

At the time of publication the author was long AAPL and GOOG.

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

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