For decades business have been required to inform the IRS if they paid any non-employee more than $600 a year. That’s about to get much more complicated and difficult due to a new clause in the Obamacare bill. Now business will be required to send 1099s to every business they’ve paid more than $600. This is a desperate attempt to tap into the underground economy – the people who work for cash and don’t pay taxes on every cent they earn.

There are plenty of other blogs and articles about how much more this will cost businesses – especially small businesses – so I won’t harp on that. It’s more important to consider how much of the legitimate economy would be lost by shutting down the underground economy.

We can’t tell for sure how much buying and selling happens without Big Brother getting his cut, but around 10-15% would be a reasonable guess. Under-the-table money can’t be banked or invested, so it’s spent directly, and usually quickly, providing an immediate economic benefit. The fact that it’s tax free means there’s more to go back into the community. It creates a huge, positive ripple effect.

We tend to think of the underground economy as being drugs, prostitution and gambling but that’s only a part of it, and probably a minor part. The larger underground economy supports and grows the above ground economy. When a contractor, building your deck, gives you a 20% discount for cash, he’s still buying his supplies from a lumberyard and paying employees (in cash). This law is designed to make that more difficult. If you don’t have that deck built because it costs you 20% more to do it “legitimately,” the contractor loses, his employees lose, the lumberyard loses, and you don’t get to enjoy a deck.

But that’s a one-shot deal. Consider the lasting effects of another huge part of the underground economy – daycare.

Legal daycare costs about $150 a week, per kid. Parents with two kids are likely to figure that $1200 a month makes it unprofitable for both of them to work. That changes dramatically when a neighbor agrees to watch both kids for $100 a week, cash. Now both parents can work full time, paying taxes in the above ground economy. If the neighbor is watching the kids for two other families it results in three full time workers contributing to the economy.

I don’t know if my neighborhood is typical, but several years ago there were at least a half dozen women offering illegal daycare in my smallish village (and that was just the ones I knew about). Figure three additional working adults per babysitter, times six, times, say, $35k a year that the parents were earning, and were talking $630,000 extra in the local economy. These are ass numbers, so lower them if you like and you’re still looking at a significant positive effect. Going after these “criminal” daycare operators would hurt everyone, damage the economy, and help no one. Doing it on a nationwide scale will have devastating effects on the economy.

And that’s just one sector. It happens all over the country, with all kinds of businesses.

Unintended consequences always result in the government causing more damage than it intends to. We can only hope this bill fails its attempt to crush untaxed transactions. If it succeeds, we’re going to see even more economic devastation.