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A comparison of Europe and the United States suggests that our conclusion about the importance of taxes is correct. European nations, on average, have imposed higher marginal tax rates on their citizens than has the United States. Estimates of the size of the underground economy are that it is twice as large in Europe as [...]

Despite drugs and human organs, however, the most important stimulus for the underground economy likely comes from taxes. Let’s face it, if your marginal tax rate were only, say, 15 percent, how much effort would you spend to avoid reporting income?