Feige, Edgar L. (2009): New estimates of overseas U.S. currency holdings, the Underground economy and the "Tax Gap". Forthcoming in: Crime , Law and Social Change (2011)
This is the latest version of this item.
Download (386kB) | Preview
Download (735kB) | Preview
Download (735kB) | Preview
Despite financial innovations that have created important new substitutes for cash usage, per capita holdings of U.S. currency amount to $2950. Yet American households and businesses admit to holding only 15 percent of the currency stock, leaving the whereabouts of 85 percent unknown. Some fraction of this unaccounted for currency is held abroad (the dollarization hypothesis) and some is held domestically undeclared, as a store of value and a medium of exchange for transactions involving the production and distribution of illegal goods and services, and for transactions earning income that is not reported to the IRS (the underground economy hypothesis). We find that the percentage of U.S. currency currently held overseas is between 30-37 percent rather than the widely cited figure of 65 percent. This finding is based on the official Federal Reserve/Bureau of Economic Analysis data which is a proxy measure of the New York Federal Reserve’s (NYB) “confidential” data on wholesale currency shipments abroad. We recommend that the NYB data be aggregated so as to circumvent confidentiality concerns, and be made readily available in order to shed greater light on the question of how much U.S. currency is abroad while providing important information on the location of overseas U.S. dollars. The newly revised official estimates of overseas currency holdings are employed to determine the Federal Reserve’s seigniorage earnings from 1964-2010, which have provided a $185 billion windfall for U.S. taxpayers. Overseas currency stock data are also used to derive estimates of the domestically held stock of currency as well as narrow and broad measures of domestic monetary aggregates. These domestic monetary aggregates are believed to be better predictors of future economic activity than traditional monetary aggregates and are tested to determine their ability to predict fluctuations in real output and prices. Domestic cash holdings are finally used to estimate the size of the U.S. fiscal underground economy as measured by the amount of income that is not properly reported to the IRS. By 2010, “unreported income” approached $2 trillion, implying a “tax gap” in the range of $430- $475 billion. Currently, we estimate that 18-19 percent of total reportable income is not properly reported to the IRS.
|Item Type:||MPRA Paper|
|Original Title:||New estimates of overseas U.S. currency holdings, the Underground economy and the "Tax Gap"|
|Keywords:||Overseas currency, currency abroad, underground economy; unreported economy; tax gap; tax evasion; cash payments; monetary aggregates; output; inflation; cash|
|Subjects:||O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E26 - Informal Economy ; Underground Economy
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H26 - Tax Evasion and Avoidance
|Depositing User:||Edgar L. Feige|
|Date Deposited:||24. Apr 2011 05:02|
|Last Modified:||25. Mar 2015 06:31|
Anderson, 1977, P. Anderson, Currency in use and in hoards, New England Economic Review, Federal Reserve Bank of Boston, (1977), pp. 21-30.
Anderson and Rasche, 1997, R.G. Anderson and R.H. Rasche, Construction of an estimated domestic monetary base using new estimates of foreign holdings of U.S. currency, Federal Reserve Bank of St. Louis Working paper 019A, (1997), pp. 1-50.
Andreoni, et.al. , 1998, J. Andreoni, B. Erard, and J. Feinstein, Tax Compliance, Journal of Economic Literature, 36(2),
Askoy and Piskorski, Y. 2006 Y. Askoy and T. Piskorski, U.S. domestic money, inflation and output, Journal of Monetary Economics, 53(2), (2006), pp.183-197.
Avery, et.al. , 1986, R.B. Avery, G.E. Elliehausen, A.B. Kinneckell and P. A. Spindt, The use of cash and transaction accounts by American families, Federal Reserve Bulletin, 72 (1986) pp. 87-108.
Avery, et.al. , 1987, R.B. Avery, G.E. Elliehausen, A.B. Kinneckell and P. A Spindt, Changes in the use of transaction accounts and cash from 1984 to 1986, Federal Reserve Bulletin, 73 (1987) pp. 179-196.
Bach, 1997, C.L. Bach, U.S. International transactions, revised estimates for 1974-96, Survey of Current Business 77(7) (1997), pp. 43-55
Bureau of Economic Analysis, 2008, News release, June, 17, 2008, pp. 1-7.
Cagan, 1958, The demand for currency relative to total money supply, Journal of Political Economy, 66 (1958) pp.303-328.
Cebula, 1997, R.J. Cebula, An empirical analysis of the impact of government tax and auditing policies on the size of the underground economy, The American Journal of Economics and Sociology, 56(2) (1997) pp. 173-185.
Cebula et. al., 1998, R. Cebula, J.V. Koch and C. Paul, Income tax rates and the public’s attitude toward government in the United States: A brief empirical note, Public Finance, 53(3-4) (1998) pp.495-98.
Doyle, 2000, B. M. Doyle, Here,dollars,dollars..Estimating currency demand and worldwide currency substitution, International Finance Working Paper No. 657, January 2000.
Feige and Watts, 1972, E. L. and H.W. Watts, An Investigation of the Consequences of Partial Aggregation of Micro-Economic Data. Econometrica, Econometric Society, 40(2), pp. 343-60,
Feige and Pearce 1979, E.L. Feige and D. Pearce, The casual causal relationship between money and income: Some caveats for time series analysis, The Review of Economics and Statistics, 61(4) (1979) pp. 521-533.
Feige, 1989, E.L. Feige (ed.) The underground economies: tax evasion and information distortion. Cambridge University Press. (1989) Feige, 1989a, E.L. Feige, Currency velocity and cash payments in the U.S. Economy: The Currency Enigma, http://ideas.repec.org/p/pra/mprapa/13807.html.
Feige, 1994, E.L. Feige, The underground economy and the currency enigma, Public Finance, 49, (1994) pp.119-139. Reprinted in G. Fiorentini and S Zamagni (ed.) The economics of corruption and illegal markets, International Library of Critical Writings in Economics, Elgar (1999), pp. 23-40)
Feige, 1996, E.L. Feige, Overseas holdings of U.S. currency and the underground economy, in Pozo (ed.) Exploring the underground economy: studies of illegal and unreported activity, Kalamazoo, Mich. W.E Upjohn Institute for Employment and Research, (1966), pp. 5-62.
Feige, 1997, E.L. Feige, Revised estimates of the underground economy: Implications of U.S. currency held abroad, in O. Lippert and M. Walker (ed.) The Underground economy: Global evidence of its size and impact. (1997), pp.151-208.
Feige et. al. 2003, E.L. Feige, M. Faulend, V. Sonje and V. Sosic, Unofficial dollarization in Latin America: Currency substitution, network externalities and irreversibility, in D. Salvatore, J.W. Dean and T.D. Willett (ed.) The Dollarization debate, Oxford university press, (2003), pp.46-71.
Feige and Dean, 2004, E.L. Feige and J.W. Dean, Dollarization and Euroization in transition countries: Currency substitution, asset substitution, network externalities and irreversibility, in V. Alexander, J. Melitz and G.M. von Furstenberg (ed.), Monetary Unions and hard pegs: Effects on trade, Financial development, and stability, Oxford University Press, (2004) pp. 303-319.
Friedman and Kuttner, 1992 B.M Friedman and K.N. Kuttner, Money, income, prices and interest rates, American Economic Review 82 (1992), pp. 472-492.
Goldberg, 2010, L. S. Goldberg, Is the International Role of the Dollar Changing? Federal Reserve Bank Of New York, Current Issues in Economics and Finance, 16(1) (2010) pp.1-7.
Gutmann, 1977, P. Gutmann, The subterranean economy, Financial Analysts Journal, 33 (1977) pp. 24-27.
Hellerstein and Ryan, 2011, R. Hellerstein and W. Ryan, Cash Dollars Abroad, Federal Reserve Bank of New York Staff Report no. 400. February, 2011.
Internal Revenue Service 1988, Income tax compliance research, Publication 1415, (1988).
Internal Revenue Service, 2007, Reducing the federal tax gap: A report on improving voluntary compliance, August 2, 2007.
Jankowski et. al. 2007, C. Jankowski, R.D. Porter and T. Rice, Against the tide-Currency use among Latin American immigrants in Chicago, Federal reserve Bank of Chicago, Economic Perspectives, 31(2) (2007) pp. 2-21.
Judson and Porter, 2010, R.A. Judson and R.D. Porter, Estimating the Volume of Counterfeit U.S. Currency in Circulation Worldwide: Data and Extrapolation, Federal Reserve Bank of Chicago Policy Discussion Papers Series, PDP 2010-2. March 1, 2010
Pasley, 2005, R. Pasley, Recent Developments in Bank Secrecy Act Enforcement, North Carolina Banking Institute, 9 pp.61-102.
Porter and Judson, 1996, R.D. Porter and R.A. Judson, The location of U.S. currency: How much is abroad? Federal Reserve Bulletin 82 (1996), pp. 883-903.
Sims, 1972, C. A. Sims, Money, income and causality, American Economic Review, 62, (1972), pp. 540-552. Slemrod, 2007, J. Slemrod, The Economics of Tax Evasion, The Journal of Economic Perspectives, Vol 21,(1) Winter (2007) pp. 25-48.
Sprenkle, 1993, C.M. Sprenkle, The case of the missing currency, The Journal of Economic Perspectives, 7(4) (1993), pp. 175-184.
Summer, 1990, S.B. Summer, The transactions and hoarding demand for currency, Quarterly Review of Economics and Business, 30 (1990), pp. 75-89.
United States Treasury Department, 2000, United States Treasury Department, 2000, The use and counterfeiting of United States Currency Abroad, January (2000).
United States Treasury Department, 2006, United States Treasury Department, 2006, The use and counterfeiting of United States Currency Abroad, Part 3, January (2006).
Available Versions of this Item
New estimates of overseas U.S. currency holdings, the Underground economy and the "Tax Gap". (deposited 25. Dec 2009 10:28)
- New estimates of overseas U.S. currency holdings, the Underground economy and the "Tax Gap". (deposited 24. Apr 2011 05:02) [Currently Displayed]