Combating the ‘Underground Economy’

Benjamin Franklin was almost correct when he wrote 199 years ago: “Our Constitution is in actual operation; everything appears to promise that it will last; but in this world nothing is certain but death and taxes.”

The Constitution has lasted 200 years. Death is still inevitable.

But Franklin was wrong about taxes. They are far from certain. The amount of fraud and deception used to successfully escape them was, and still is, enormous.

Happily, an experiment in law enforcement has been started in California by the Deukmejian Administration to try to make taxes less easy to avoid, if not inevitable, because it shows at least an awareness of a serious problem. The new campaign is aimed at breaking up massive tax evasion schemes and labor law violations that together make up a $40-billion “underground” economy in this state alone.

Sadly for honest citizens, though, past efforts have had no significant impact on the underground economy anyplace in the United States. And California’s new experiment in law enforcement offers little hope of making taxes the certainty that Franklin said they were.

Only New York and Massachusetts, and now California, are making any concentrated attempts these days to crack down on the tax cheats and labor law violators.

The California effort is just getting started. Deukmejian Administration officials predict that in time they will be somewhat successful.

But no one suggests that, even in the long run, the latest attack on the problem will come close to stopping the pervasive violations of state and federal worker protection laws and evasion of taxes by under-the-table, unreported cash payment of wages and other business costs.

No new funds or law enforcement agents are available for a massive crackdown on those who flout the laws. Making the usual “budget restraints” argument, Deukmejian is not even asking for additional money and personnel to increase the odds against the cheaters.

In fact, the most important fact about the new anti-cheating campaign is that it has started.

Its very existence might act as a slight deterrent against such widespread practices by employers as paying wages in cash to avoid income taxes, Social Security taxes and insurance premiums to provide benefits for unemployed and injured workers.

Some timid underground employers might be frightened by the possibility of more-rigid law enforcement. But it must be a strong possibility if it is to have that effect.

Then, fear of apprehension might not only encourage them to pay their taxes but also to comply with labor laws such as those that require a license to be a construction contractor, payment of the $3.35-an-hour minimum wage and overtime pay.

Employers are the major culprits. But they could not get away with their crimes if more workers refused to accept cheating by their bosses.

Some workers, including union members, welcome their employers’ dishonesty so that they, too, can avoid taxes. It isn’t usually cost-effective for those workers, though, because they are almost always cut out of valuable fringe benefits such as health insurance.

Other workers, especially illegal aliens, are compelled to go along with their bosses’ crimes just to get and keep their jobs and escape deportation.

Since there are more than 400,000 employers in California and only a few hundred law enforcement agents, cheaters now have an excellent chance of avoiding detection. The odds against them are not likely to increase significantly even after Deukmejian’s Multi-Agency Task Force on the Underground Economy is operating at full speed.

Some officials voice legitimate concern that enforcement is made more difficult by columns like this reporting the fact that the odds of cheaters getting caught are small. But they don’t deny that the odds are slim.

The new drive against dishonest employers and workers was conceived in 1985, when California’s Little Hoover Commission recommended creation of a special task force to at least try to coordinate the various state and federal agencies that are supposed to catch the tax evaders and labor law violators.

Last year, the governor created the Multi-Agency Task Force on the Underground Economy. Its duties were later expanded by the Legislature.

After one year in operation, the task force’s major achievement has been an agreement by several agencies to try to coordinate their law enforcement efforts. That belated agreement could be an achievement in itself when you consider how many agencies are involved: The federal Internal Revenue Service and Department of Justice, the state Department of Industrial Relations, Employment Development Department, Franchise Tax Board, Board of Equalization and the Contractors State License Board.

Each agency has been operating independently. A company might violate several laws, but if one violation is spotted by one agency, the firm will be prosecuted for only that violation. Other agencies are not automatically alerted to look for additional law violations they are supposed to catch.

From now on, they are supposed to communicate with one another. That could result in multiple charges against an employer, stiffer penalties and an increase in the fear factor that discourages other would-be cheaters.

The pervasive nature of California’s underground economy is evident in state government spot checks made in the garment industry. For example, a recent check of 908 garment manufacturers showed that 817 of them were in violation of wages and hours laws.

The restaurant and construction industries are also badly infected by the corruption of the underground economy. Example: State investigators report that many underground construction contractors pay people $6 or $7 an hour to work as electricians. Pay is in cash, and workers get no medical care, pensions, vacations or holidays.

Workers escape income and Social Security taxes. Contractors get cheap labor, escape some taxes and insurance costs for unemployment benefits and on-the-job injuries.

Even though often this kind of electrical work is badly done, the consumer pays only a little less than it would cost to hire a legitimate company--the underground contractor pockets most of the savings made by tax evasion and labor law violations.

But such contractors do cut prices somewhat, and that makes them tough competitors for law-abiding union and non-union electrical contractors. In contrast to workers in the underground economy, members of the International Brotherhood of Electrical Workers Local 11 members here earn $23 an hour, plus almost 30% of their wages for health care, pensions and other benefits.

The cheap labor available in the underground economy, swollen especially in California by illegal aliens, has proven irresistible to many contractors. Greed overcomes any sense of integrity they may have and their fear of being caught.

Activating the task force shows an awareness of the problem, a necessary beginning.

But to be more effective, both the penalties against law violations and the number of enforcement agents must be increased. The resulting increased tax revenue should easily offset the added cost of enforcement.

German Work Week May Set Standard

The leader of a worldwide labor federation believes that the recent agreement to reduce the work week of 1.5 million metal workers in West Germany to 37 hours will set the standard for all industrialized nations, especially the United States and Japan.

Herman Rebhan, general secretary of the Geneva-based International Metal Workers’ Federation, may be correct, because West Germany is the world’s fourth-biggest economic power and what happens there is bound to have an impact on other countries.

But while a shorter work week is a good way to cut unemployment, there are no signs that Rebhan’s prediction will come true in the near future.

Unions representing workers in auto, steel, aerospace and other metal industries in this country and Japan are having a hard time just holding their own, much less taking the kind of historic step forward achieved by Germany’s IG Metall.

The German workers won a 38.5-hour work week three years ago after a lengthy strike. The new agreement was reached last month without a walkout but it took a realistic threat of a strike to overcome strong employer resistance.