The Shadow Economy

Aspects of the Shadow Economy

Drugs

• The illegal drug trade has existed for as long as drugs have been outlawed.

Economic Effects

• National Institute on Drug Abuse (NIDA) estimated $181 billion in the illegal drug trade.

• Aside from estimates regarding the drug trade itself, it has a ripple effect that extends to other aspects of the economy.

o The tax revenue that goes to inmates who were put in jail solely for drug related crimes.

o The tax revenue that is spent on the police force and DEA that devote their time to enforcing drug laws.

o An estimated 50% of judiciary time is spent on drug offenders.

Comparing Other Policies

• Countries in Europe have taken a different approach to handling the drug problem.

• The policy in the Netherlands saves resources by having the police deal with more serious crime and leave non-disruptive drug users alone. Consequently less tax revenue is used on drug offenders.

• Switzerland has had successful experiments with prescribing heroin to addicts, leading to the reduction of heroin-related crime and death.

• Not only do these policies of decriminalization and regulated administration work socially, they reduce that sector of the underground economy, and turn it into a regulated, taxed system.

Counterfeiting

• Counterfeit refers to any imitation item that is fraudulently passed off as real.

• Currency, documents, clothing, media items, pharmaceuticals, and all trademarked and copyrighted goods are subject to counterfeit.

• Counterfeit products encompass those that are nonfunctional and are only made to look like a product, and those that are generally of similar quality to the original but were made illegally, without the consent of the copyright owner.

• The reproduction of copyrighted and trademarked items is referred to as Intellectual Property crime.

• In addition to fake items being sold, “bootleg” items are those that are of similar quality to the original but sold at drastically low prices.

• the end user often knows they’re counterfeit but ignores that due to cheap prices.

Economic Effects

• Counterfeit products are estimated to exceed 6% of global trade.

• The FBI estimates that legitimate business loses between $200 and $250 billion dollars per year

• In addition to the hundreds of billions of dollars that Intellectual Property crime cost the public and businesses, there is a ripple effect that extends to many other aspects of the economy.

o It can potentially slow investment and innovation in the business world

o Law enforcement is forced to devote time and resources to stop counterfeiting

o Counterfeit products almost always escape taxation

• The city of New York loses an estimated $500 million in state sales tax due to counterfeit goods.