The Underground Economy in Canada: Boom or Bust?

On a recent Saturday afternoon, a truck made its way down the street in Saint John where I live. Going from door to door was the truck’s owner, offering driveway sealing services for $50 cash and no goods and services tax (GST). Professional curiosity prompted me to ask whether cheques were also acceptable. (I pretended to have no cash.) The answer was a very reluctant yes, but the cheque would have to be made out to him personally, not to his business. All in all, it was typical of the encounters most of us knowingly have with the underground economy. Such experiences, however, do not help us very much in determining just how big the underground economy is. As readers of this journal will know, a considerable debate has gone on in Canada over the last decade about this question. David Giles and Lindsay Tedds’s recent book, Taxes and the Canadian Underground Economy, is one of the most recent contributions to this debate.1 Giles and Tedds’s study is probably the most ambitious attempt to date to study the Canadian underground economy. It concludes that the underground economy in Canada is about 15 to 16 percent of recorded gross domestic product (GDP). Giles and Tedds contend that this is a broad estimate of both legal and illegal underground activities and of both cash and barter transactions. They do not contend that GDP is understated by this amount; some of the components of so broadly defined an underground economy are deliberately omitted from the national accounts. In this comment on Giles and Tedds’s study, I shall focus on their method and its results. It is worth stressing, however, that the book contains much more than just a detailed account of Giles and Tedds’s own empirical work, although that account naturally forms its core. It also presents a valuable account of the current state of investigations of the underground economy, not just in Canada, but around the industrialized world. It also draws together the relevant theoretical literature and presents its conclusions in an accessible way.