Study Says Mob Harms Economy by Tax Evasion

Organized crime is severely damaging U.S. economic output by evading taxes and generating higher prices through mob involvement in industry, a study for the President’s Commission on Organized Crime estimates.

The study of organized crime’s income, conducted by Wharton Econometric Forecasting Associates of Philadelphia, is a major part of the final report of the commission, headed by federal appeals Judge Irving R. Kaufman. A copy of the report, which will be issued today, was obtained by The Times.

Wharton theoretically calculated that organized crime is reducing U.S. economic output by an estimated $18.2 billion annually, cutting employment by 414,000 jobs, raising consumer prices by 0.3% and reducing per-capita income by $77.22.

Unions Controlled

“The effects of organized crime on the legitimate economy show up in higher prices for consumers when competition is suppressed, lower wages for workers when labor unions are controlled and less safety when corners are cut on construction projects or toxic waste is not disposed of properly,” the study said.

In calculating the impact on U.S. output, the study said: “If taxes were paid on all income earned by the individuals associated with organized crime, the taxes paid by ordinary citizens could be reduced by this amount.” An Internal Revenue Service survey found that organized crime figures report only about 40% of their incomes.

However, the study appeared to take no note of the fact that the President and Congress have not traditionally held federal expenditures to the amount of current tax revenues, and that payment of unpaid taxes would not lead the government to automatically reduce overall tax collection.

‘Low Estimate’

In simulating the impact on the economy of reducing personal taxes by the amount of organized crime’s underpayment, the study used Wharton’s “low estimate” that organized crime realizes annual income of $29 billion.

“Narcotics is the most financially rewarding business in which organized crime is involved,” the Wharton study said, noting the high and rising level of illegal drug consumption in the United States, coupled with the high price of narcotics.

“Thus, criminals are able to import and distribute illegal drugs with minimal risk and fairly few expenses,” the study added.

Average Tax $6,000

The IRS study estimated that from 1969 through 1981, drug traffickers who filed tax returns reported an average adjusted gross income of $27,000 and paid an average year’s tax of $6,000. Based on criminal cases, the IRS estimated that on average the narcotics traffickers failed to report $121,000 of annual income and owed $68,000 in taxes.

IRS civil case estimates, which include technical adjustments not counted in the criminal case figures, show that narcotics traffickers on average failed to report $134,000 in income and to pay $109,000 in penalties, interest and taxes.

“Based on this study, it is estimated that the average adjusted gross income of a narcotics trafficker successfully investigated by the IRS was $161,000,” the IRS study said.