A quarter century ago Canada, Mexico and the United States formed a customs unio

Question

A quarter century ago Canada, Mexico and the United States formed a customs union, known as NAFTA. This is not a common market, and indeed there are an estimated 7 to 10 million illegal immigrants living in the United States, many of whom are Mexicans. Furthermore, “illegal drugs are the most successful Mexican multinational enterprise, employing some 450,000 Mexicans and generating about $20 billion in sales, second only behind the country’s oil industry and automotive industry exports”. (Source: David Luhnow, “Saving Mexico”, WSJ, December 26, 2009.)

A.Distinguish between a customs union and a common market.

B.Explain why there has been a growth in the underground economy of the United States.

C. Evaluate the following non-exclusive means of diminishing the underground economy:

-Transform NAFTA into a common market.

-Legalize drugs.

- Increase both the surveillance by the IRS of the 30 million businesses in the United States and reform the tax system by introducing, for example, a value added tax.

-Increase the effectiveness of surveillance of social security recipients from gaining income from the underground economy.

Explanation / Answer

A customs Union aims at reduction or removal of trade barriers between two or more neighbouring countries. It attempts to promote trade between these countries by imposing a common tariff on imports from other countries, But does not allow free movement of goods, capital and labour as is done in a Common market. This is an attempt at partial economic co-operation between nations.

Common Market

If countries decide to impose a common external tariff the customs market idea gets extended to a common market or common economic union. Treade flows thereby increase between these countries and factors of production like Capital and Labour begin to move freely between them.

Why Are Shadow Economies Growing?

1.    Nations that have less cumbersome tax-laws and less restriction of regulations and high level of law and order enforcement tend to have lower levels of shadow economies.

2.    An ever growing demand for resources by the government creates pressure on the public for a higher tax-burden. The government may in fact be spending the money for social security. More regulations on the labour market also create shadow economy. A high level of minimum wages puts employers at a disadvantage and they attempt to employ shadow labour at shadow wages.

3.    If there is a large difference between the cost of labour in the official economy, and the after tax-earnings of workers, there will be increase in shadow economy, as people have an incentive to hide incomes of moonlight after the official jobs.

4.    If the net wages ( after tax ) increases sufficiently people will be less attracted to move to the shadow economy. Empirical studies have shown that this is so in several countries. Studies also reveal that where people tend to perceive current tax rates to be too high, an increase in tax rates will decrease total tax revenues.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.