Barron’s has an important lead article out today on “the underground economy” (password required). According to Robert Justich, a senior managing director at Bear Stearns Asset Management in New York, current estimates of the illegal alien population (most news articles cite the old 8 to 13 million figure) are too low. He puts the figure at 18 million to 20 million.

The article’s author, Jim McTague, notes some devastating consequences of the failure to enforce our immigration laws–and he does so with a bluntness that is unusual for the usually open-borders-friendly business press:

[T]he underground economy is undermining the effectiveness of the Internal Revenue Service, which is highly dependent on employees’ withholding taxes. If the IRS could collect all the taxes it says that it is owed from the underground economy in a given year, then the current budget deficit would disappear overnight. And if the IRS could collect these taxes every year, then the nation would have surpluses as far as the eye can see.

The IRS has estimated that its tax gap — the estimated amount of taxes owed minus the amount collected — is around $311 billion in any given year. The agency will produce a new estimate in 2005, and it could be as high as $400 billion, says former IRS Commissioner Donald Alexander.

McTague addresses pollyannas who note that our underground economy is smaller than other high-tax European countries:

To be sure, the U.S. underground economy, as a percentage of GDP, is smaller than those of some other countries. In a 2000 paper in a publication of the Independent Institute, a nonprofit research organization, Schneider found that Greece, as of 1998, had the largest underground economy, at 29% of its GDP, followed by Italy at 27.8% and Spain at 23.4%. Countries with high tax burdens and high social security costs lead the list.

But the sheer growth of the underground economy in the U.S. is cause for concern. If Justich’s estimate of illegal immigrant workers is correct, the underground economy may now be growing at a markedly faster rate than the legitimate economy. Justich, working with Bear Stearns colleague Betty Ng, an emerging- markets economist, says he’s found evidence of a larger illegal immigrant population by analyzing data on construction and on remittances sent from the U.S. to Mexico and other countries. He also had conversations with over 100 immigrants from Mexico, Brazil, the Dominican Republic, Guinea, China and Tibet. And he interviewed local business owners, real-estate sales people and police…

McTague also considers the impact Justich’s research may have in Washington:

A larger number of illegal immigrants also would have a profound impact on coming discussions on immigration reform. President Bush proposes temporary amnesty for illegal aliens already in the country, allowing them to obtain permits to work legally for three years and stay longer if their jobs otherwise can’t be filled by native-born workers. But if there are, in fact, 20 million illegal aliens, the Bush proposal could engender a situation not unlike the German unification of the 1990s, which triggered huge demand for social services in East Germany. Unanticipated costs here could be enormous.

The article should be must-reading for every member of Congress as President Bush prepares to foist his amnesty plan on America.

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