The absurd dream of curbing tax evasion by going cashless

Article published on Jan. 2, 2018
Article published on Jan. 2, 2018

This article has not been vetted by an editor at Paris HQ

The increasing rate of tax-related scandals has reached proportions which go beyond the simple enforcement of law. No month goes without headlines being filled with revelations about a politician or celebrity either failing to pay his taxes or cleverly reducing them. 

Governments have therefore seized the opportunity of their societies naturally drifting towards cashless systems to hail the deletion of cash as the solution to tax evasion. But not only would killing cash do very little against high-level tax evasion, it would be terribly harmful to our societies. 

Governments have hated cash for a very long time. The reason is simple: it eludes their control. It makes life difficult for law enforcement. In October of 2016, Nathan Coates wrote for the Money : “A massive stash of cash may sound like a good thing, but according to one US economist, the vast numbers of banknotes in circulation around the world are making us poorer and less safe [...] Ken Rogoff, an economics professor at Harvard, has been writing about paper money for 20 years and he says much of this cash "is used to facilitate all sorts of crime". It impedes economic policies, because the cash layer of the economy does not provide the immediate and reliable feedback which virtual money brings. Nathan Coates adds: “Investments suddenly gone bad would spur a rush to convert capital into hard currency, decreasing the effectiveness of the interest rate drop (even leaving aside the problem of large amounts of money disappearing from the economy).” It runs under customs’ radar screens, as Business Insider reported last summer: ”On Tuesday, US border agents patrolling north of San Diego intercepted two vehicles carrying more than $3 million in cash, in what a top official called the largest money bust in the sector's history.” But is cash really used mainly for illegitimate purposes?

The fact is, there are far better ways to avoid taxation than to smuggle cash through customs. This technique, though it does exist, ranks among the least effective ones. The risk is too high, the gain is too small, and it ties the misdemeanor directly to a person. In fact, tax evasion uses mostly cashless methods. One of these methods is shell companies: a tax fugitive sets up a shell company in a tax haven and treat them as a regular supplier, recuperating the funds tax-free, later on. Another common method is the false penalty claim, where the tax-evading company will set up a contract with the shell company in the tax haven, in which a penalty is due if the contract is not carried out duly. The contract is then voluntarily botched, and the penalty is paid to the shell company, via bank transfer. With methods such as these, very large sums can be wired quite easily, and the paper trail can be blurred indefinitely using screen companies in different countries, to impede investigations. This proves far less risky and far more convenient than sewing dollar bills into the lining of a jacket, of course. So why would governments claim to be in favor of cashless economies for the purpose of fighting tax evasion, when only an insignificant fraction of tax evasion takes place in this way?

There are multiple reasons for this claim. The first is that central banks are tired of managing cash, which is costly and tedious to create, move and secure. It generates important costs for them, in the fighting of counterfeiting, the management and replacement of used notes, etc. Law enforcement tends to dislike cash also, which they associate with high-level crime. Also, crimes involving cash tend to be violent, whereas white-collar financial misdemeanors are usually far more civilized, causing less public unrest. Finally, it’s not the big-time tax evasion which governments are eager to get their hands on, it’s the general public. No matter the magnitude of the fraud, busting a millionaire for funnelling part of his wealth abroad will never earn state coffers more than a few hundred thousand pounds, or maybe a few millions. But getting the entire economy under radar control, with the masses, that would be a game-changer, with tens of billions of pounds which the government could draw from its population.

The Guardian reported last year that “Tax fraud is costing the government a “staggering” £16bn every year but HM Revenue & Customs is failing to clamp down on complex tax evasion and organised criminal activity, a report by the government’s independent auditors has found”. But much of this isn’t the work of a handful of billionaires, as most of this money would be simply recouped by expanding the tax base to its maximum on the average taxpayer. No more one-timers, no more operations too-small-and-occasional-to-bother-declaring, every penny would be accounted for. A public accountant’s dream. But telling the public that the aim is to get the population under absolute and inescapable fiscal control would hardly be a clever way to sell the idea, so claiming the intent is to curb the outrageous injustice of rich people (whom everyone hated to begin with) refusing to pay their share is a far better pitch.

It would take a serious lack of wit to consider that, should cash entirely disappear, tax fugitives would then say: ”Oh, well! It was nice while it lasted, now let’s start paying our taxes”. If any significant change is to be made regarding tax evasion, it is unlikely the disappearance of currency would help in that regard. People strongly committed to avoiding taxes will use many of the alternate ways to do so, whereas more docile masses will simply bear the brunt of the reform, and be tracked by their governments in unprecedented ways.