As he government grows, so does the underground economy. It should be obvious that higher taxes and more laws create a greater incentive for people to hide their transactions from the government whenever possible. This basic principle takes many forms. In the USA there are many mechanisms forcing people and money into the underground: child support, student loans, drug laws, child custody laws, child labor laws, immigration laws, and welfare laws, to name a few.
Isaac Newton famously stated that for every action there is an equal and opposite reaction. This seems to be applicable to politics as well. Every law contributes to the underground economy. The size of this reaction is proportional to how vigorously the law is enforced, and how much opposition there is to the law in population.
Murder is against the law, and there are people who make a living by breaking that law, but they are rare outside of government. Most people support the law against murder. Using marijuana is against the law, and support for that law is steadily weakening. There are large numbers of people making a living by breaking the marijuana laws, and an even greater number supplementing their income from pot. Some of these people are employees of the government. Some are not.
Child support is an extremely regressive and arbitrary tax. The state recognizes the obligations of the parent toward the child, but it does not recognize the obligations of the child toward the parent. Instead the state emphasizes the obligations of the child toward the state, starting at the age of six and continuing until old age. Child labor laws prevent children from learning to engage in commerce at an early age, and teach them to expect to get something for nothing. For many, this is a lesson that lasts their whole life. Many parents are driven into the underground economy by huge child support obligations.
Student loans are another reason for people to work off the books. Since the government schools often grant degrees to people who are incapable of using the “skills” they learned in college to make a living, but they are saddled with huge debts for the useless education they bought. They must repay these debts at by working at their true market value, which may be much less than they were lead to believe by the college recruitment system. They may well feel betrayed by the system or just find it impractical to work in a “legal” job. Even the student who excels on the job has an immense incentive to emigrate or find other means of avoiding the student loan debt.
It should be fairly obvious how welfare, drug, and immigration laws contribute to the underground economy. It is also not difficult to analyze the effects of taxation.
Laws also create a class of people whose job it is to enforce the law. Perhaps it is necessary to have some laws and some enforcers, but taking on a new law, and creating a new class of enforcers should not be done without serious need. The enforcers do no other work, so if the law they enforce does not improve the society, they are consuming resources without doing productive work. It is not clear that a monopolistic government is the best framework for such enforcement, or that the application of force is the best method for controlling behavior. The power of suggestion is often more effective than the power of fear.
A proliferation of laws makes it difficult for the government to effectively manage the society, because it creates incentives for citizens to lie about their behavior. Accurate information is necessary to make wise decisions, and violence is the enemy of accurate information. A law impedes the flow of information in a society. When we learn to calculate the cost of that loss of information, I expect it will be greater than most would believe.
Any law can be viewed as a war, or at least a political struggle. A law says, “You are either with us, or you suffer the consequences”. Laws make people fight, and people who are fighting are destroying resources rather than creating them. Societies that fight less and work more are more prosperous. War has serious costs. Wars should not be started for trivial reasons. The more laws a society has, and the more vigorous the enforcement of these laws the poorer the society will become. There ought to be a law against allowing that to happen in the USA, but I don't think it would get many votes in congress.
Government and laws create chaos, waste and war. Anarchy creates order, efficiency, and peace.