We've another instance of that desperately sad confusion over the economy and the government, the difference between the Treasury and the nation. There are most assuredly people who go around paying and earning in cash and not, very naughtily, paying the requisite taxation on such sums. This will cost the Treasury tax revenue, this is entirely true. But it does not cost the nation or the economy anything:
For homeowners eager to save money on repairs, it’s a tempting proposition – you pay a tradesman cash-in-hand, he knocks a bit off the bill, and no questions are asked. With the builder or plumber failing to declare their earnings and pay any tax, such secret payments are said to cost the economy £2billion a year. Now a survey suggests the black economy is booming, with more than four in five homeowners admitting they have paid a workman cash-in-hand.
This simply is not a cost to the economy as a whole. For that money is still circulating, the economic activity is still happening, therefore it cannot be a cost to the economy. We might take it a little further too. We know very well that the levying of a tax reduces economic activity purely by being levied. The marginal deadweight cost at current levels of taxation is put at around one third or so. The corollary of that is that some one third of currently untaxed activity would simply not happen if it were taxed. The grey economy (intrinsically legal but untaxed) is thus in part an addition to the size of the economy we would have if all transactions were taxed.
But more important than that we have to insist on killing the pernicious idea that the economy is the Treasury, or that the Treasury is the economy. Economic activity that doesn't pay the tithe to the Treasury is still economic activity and thus is not a cost to the economy as a whole.