Somewhat related to the question of consensual sex between adults is the idea of consensual financial transactions between adults. What I'm unable to fully understand (in the philosophical sense) is why the former should be freely legal, but the latter is subject to government regulation.

I'm not talking solely about direct exchange of money for sex. Prostitution is only one form of criminal financial transactions. There are many others.

The so-called "underground economy" is growing by leaps and bounds. As to why, an article in Barron's provides a few clues:

Growth of the underground economy is partly a result of corporate downsizing, which has forced many former employees to go out on their own.

"We have had an 85% taxpayer compliance rate," says Nina Olson, the IRS's taxpayer advocate. "I expect the number to decline," because the portion of employees subject to withholding is on the wane. Such employees are 99% compliant with tax laws, she says, but in the 21st-century economy, "More and more people are being treated as independent contractors. We are losing people from the withholding environment."

Entrepreneurs often are stymied by the complexity of estimating their
taxes and making quarterly payments, which leads to mistakes or out- and-out avoidance. The growth of online commerce may be exacerbating the situation. There were over 40 million regular users of eBay alone in 2003, up from 23 million in 2002. The sellers are responsible for paying taxes. Some of them set up a business and get a taxpayer ID number; others don't. (An eBay spokesman says the company isn't a tax adviser -- it's up to members to report their taxes.)

Most unsettling to IRS bureaucrats, taxpayers as a group appear to have become less honest. Former New York City Police Commissioner Bernard Kerik is the latest poster boy for the phenomenon. He had to drop his bid to become secretary of homeland security because he failed to pay Social Security taxes for his children's illegal-immigrant nanny.

Kerik is hardly alone: Any homeowner who has been offered two prices by a handyman or a gardener -- a higher one for a payment by check, a lower one for all cash -- knows how quickly the savings can add up. In one twist on off-the-books business, the New York Times recently reported on a rise in mechanics who repair cars at curbside for untraceable cash payments. They are not in want of customers. In some cities, including Boston, owners of battered cars get similar offers from itinerant body-repair "experts."

Lest anyone think I'm engaged in hyperbole, take a look at an ordinary accountant's description of what I must do if I pay the guy for gardening:

If you do hire someone who will receive more than $1,100 this year, and you insist on doing the paperwork yourself, here are a few things you should do:

A. Start with IRS form W4 and the Labor Department's form I-9. Form I-9 requires that you take a look at official documents to insure that the employee is allowed to work in the US. Passports, drivers licenses, birth certificates, and social security cards are the types of documents you must review. I like to exercise extreme caution and keep a photocopy of these important records in my payroll files.

B. Request an employer identification number from IRS by filing form SS-4.

C. Check your state tax filing requirements. This presents yet another complication. We may already be confused by the 2 different filing requirements at IRS, or $1,100 per year for the purpose of Social Security and Medicare taxes, but $1,000 per quarter for federal unemployment taxes. In addition, you may face different filing limits for state income taxes, state unemployment taxes, and required state disability and workers compensation insurance policies. Thankfully, NY State has recently consolidated unemployment and income tax reporting. However, one of my best clients recently forwarded me a notice from the "Workers Compensation Board" stating there were different requirements depending upon the number of hours worked by his domestic employee.

D. After checking your state requirements the next step is to arrange for the appropriate insurance. In most cases, NY State requires both disability and Workers Compensation policies.

E. Withhold the proper amount of Social Security and Medicare taxes. The combined rate is 15.3%. You can split this with your employee or you can pay it all. You are not required to withhold federal or NY State income tax, but you can if you and your employee want to.

F. Adjust your estimated taxes or withholding tax to reflect the additional payroll taxes you now will owe to Uncle Sam. Unless you are self-employed and have other employees, the social security and Medicare taxes will become part of your income tax liability for this year. You can be penalized if you don't pay enough estimated tax before each quarterly due date.

G. File the appropriate returns with your state or local tax departments. NY State requires quarterly reports.

H. File form W-2 to report the employees’ wages for the year. The employee copies are due by January 31 and the government copies are due by the end of February.

I. File Schedule H with your income tax return. Unless you are self-employed, you must report household employment taxes with your 1040.

A final word of advice for anyone who chooses not to follow these guidelines: I suggest that you should not run for political office in the future.

The so called "nanny tax" does not only apply to babysitters. It applies to any household or domestic employee. To quote the IRS Regulations Section 31.3306(c)(2)-1(a)(2),

"In general, services of a household nature in or about a private home include services performed by cooks, waiters, butlers, housekeepers, governesses, maids, valets, baby sitters, janitors, laundresses, furnace men, caretakers, handymen, gardeners, footmen, grooms, and chauffeurs of automobile for family use."

Since that list is not inclusive enough for me I will add bookkeepers, cleaning services, private nurses, and the kid who mows your lawn. By the way, can anyone tell me what a "footman" is? And, do I need one?

While the standard argument is that illegals work for less money, or perform the sort of work Americans don't want to do, I think there's more to it than that. I was thinking this over the other day as I contemplated two things: my own yard work, and a lawsuit a friend is facing because he made the mistake of hiring an American with a strange psychiatric disability of which the employer was unaware (and which causes the employee to deliberately make mistakes on the job). This same friend also employs aliens (supposedly legal) through a "temporary" agency, and of course he's never had any trouble with them. The psychiatrically challenged American, though, not only "knows her rights," she feels a sense of extravagant entitlement, which in her mind, gives her the right to be incompetent and the right not to be fired for being incompetent. The legal system, of course, works with her to enforce these "rights."

In Mexico, if you're walking down the sidewalk and (as happened to me once) a six-foot-deep ditch appears in front of you without any warning signs or guardrails, and you fall in, the attitude will be "you should have looked where you're going." You won't be able to sue anyone, as you'll get nothing. Nada.

Who wouldn't prefer to hire a person who comes from such a culture?

Anyway, as I contemplated yard work, I realized that the hourly wages had nothing to do with it. Let's assume that the going wage for hacking out brambles and pulling up weeds is $15.00 per hour. If you hire an American, it's not an arms-length transaction. You have special duties to take care of his taxes and all that other fussy legal stuff. And what if he gets hurt and sues you? It isn't worth the risk, and the potential hassles are endless. The hourly rate is in my view a secondary, not a primary, factor.

Seen this way, I think that illegal aliens represent something much more important and compelling than a source of "cheap labor." They're a glimpse of that American freedom which was once our birthright.

In this country, there was a time when you could just agree with someone that in return for doing a certain thing, you'd pay him. And if he did the work, you could pay him, and that was that.

That's the way it was when I was a kid, and with aliens, it's still that way.

Under the present system, of course, they're considered to be "stealing jobs from U.S. citizens."

But has anyone stopped to ask why there wasn't an "underground economy" in the days of American freedom?

(It used to be a term generally reserved to describe private transactions in the Soviet Union.)

NOTE: Lest readers misunderstand me, I do not advocate open borders. Not by a long shot. I think the border should be closed ASAP, because illegal immigration is out of control. My point is that I think over-regulation is fueling the demand for these aliens, and I'm not sure that more draconian penalties against ordinary Americans will be the best way to help the economy.

AFTERTHOUGHT: I think it should be remembered that years ago, people like nannies, gardeners and the like didn't used to be part of the "underground economy." They were paid cash legally in the old days -- just as they are paid cash illegally now.

It doesn't take a degree in economics to see that the more things become criminalized, the more "crime" there will be!