A CONSERVATIVE ESTIMATE PLACES THE INCOME GENERATED IN THE UNDERGROUND ECONOMY IN 1977 AT $195 BILLION, ABOUT 10 PERCENT OF THE RECORDED GROSS NATIONAL PRODUCT. TO THE EXTENT THAT THE UNDERGROUND ECONOMY IS GROWING FASTER THAN THE LEGAL ECONOMY, BOTH THE LEVEL AND RATE OF GROWTH IN ECONOMIC ACTIVITY ARE SERIOUSLY UNDERSTATED BY GROSS NATIONAL PRODUCT FIGURES. THE OFFICIAL UNEMPLOYMENT RATE PROBABLY OVERSTATES THE AMOUNT OF ACTUAL UNEMPLOYMENT, AND THE UNITED STATES MAY BE APPROACHING THE POINT WHERE HEAVY MARGINAL TAX RATES ARE ERODING THE TRADITIONAL BELIEF THAT CITIZENS VOLUNTARILY PAY THEIR TAXES MORE READILY THAN INDIVIDUALS IN OTHER DEMOCRACIES. THE UNDERGROUND ECONOMY NEEDS CASH TO OPERATE; THIS AFFECTS THE CIRCULATION OF MONEY. IF TAXES WERE PAID ON UNDERGROUND INCOME, THE DEFICIT BETWEEN INCOME REPORTED AND ESTIMATES OF INCOME NOT REPORTED ON TAX RETURNS MIGHT VANISH. THE GOVERNMENT ESTIMATE OF FAMILIES WHO LIVE IN POVERTY IS UNDERSTATED BECAUSE OF THE UNDERGROUND ECONOMY. HIGH TAX RATES ARE CITED AS ONE INCENTIVE FOR THE DEVELOPMENT OF THE UNDERGROUND ECONOMY. (DEP)