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Why High Taxes Makes Black Market Nannies Necessary

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In recent weeks, since the naming of new ministers in Sweden and the revelation that some of them hadn’t paid the special tax on television sets called “TV-license” and had hired black market nannies, there have been increased discussion of the morality of tax evasion.

Stefan Swärd, an Evangelical leader, claimed [In Swedish] that tax evasion is “theft” and said that not paying the excessive taxation imposed on work efforts is equivalent to going to a municipal building and take money out of their pay office.

The fallacy here should be apparent. When one performs a black market activity one does not make the State or anyone else worse off. If you hire someone to clean your house, the State will receive no less income than had you cleaned the house yourself or had no cleaning taken place and the house remained a mess.

Nor can the State legitimately claim credit for the activity. The State had no role in initiating or performing the activity and so it could not in any way claim moral credit for creating the activity. Perhaps one could argue that the State’s implicit police protection for the fulfillment of obligations (even that is dubious not least considering that we’re talking about a black market transaction) gives them a small right to revenue, yet even assuming that, that would be more than paid for anyway by the taxes that even black market workers are likely to pay in their official market dealings.

If there is any “theft” involved here, then it is outrageously excessive taxation imposed by the Swedish government where hardworking people are deprived of the fruits of their labor.

It must also be emphasized that when it comes to many of these particularly labor intensive activities, the high tax rates now imposed make it necessary to perform them underground – or else they won’t be performed at all.

Consider the case of, say, an accountant who produces a value of $50 per hour with his work and a would-be nanny who is willing to work if she receives at least $10 per hour. In a free society they would undoubtedly make a mutually beneficial deal where the accountant pay the nanny somewhere between $10 and $50 per hour to perform some household services, allowing the accountant to either work more or to have more spare time. Even had there been a modest level of taxation, like the 15% flat tax in Hong Kong, there would be no trouble making a deal, as the marginal value of work as an accountant for the accountant would have been $42.50 and the minimum pay for the would-be nanny would cost the accountant $11.80.

But with the Swedish levels of taxation, where the total tax wedge is more than 70% for high-income earners and 60% for low-income earners, no such mutually beneficial exchange will take place. This is because the net income for the accountant is just $15 per hour, while the minimum pay for the nanny will cost the accountant $25 per hour. This will induce the accountant to reduce his hours and perform these household services himself, as this will be economically rational for him under these conditions.

The end result: the state will receive no tax income for the household services. Meanwhile, the accountant will produce less of his highly productive services and the would-be nanny will go unemployed.

From what perspective would it then be immoral to pay the would-be nanny $10 in a black market transaction with money received from a highly taxed job and so give the accountant more time to perform his highly productive services or the spare time he needs to endure his job and at the same time give the would-be nanny more income? The rest of society will certainly not lose, if anything they will win, while the two involved parties will both benefit.

The high tax rates that in effect forbid the legal performance of these mutually beneficial exchanges should be recognized as the immoral element here – not the “black market” performance of these mutually beneficial exchanges.

October 23, 2006