The middle class don’t think that paying their builder or nanny or gardener in cash is a crime. But it is. And, just for the record, I pay mine using FPS. We need to change this attitude to start the revolution.
Remember the interesting discussions a while back concerning the use of cash in informal economies world wide? I have speculated at a couple of recent events, including at the enjoyable Wired Money in London in July, that this “cash gap” can no longer be tolerated in developed countries and ought to lead to government policies that boost the electronic payments sector. Now I read in Prospect magazine — H. McRae. “Make your own work” in Prospect (Jun. 2014) — that Morgan Stanley estimate the UK economy might be around four percent larger than the official GDP per work statistics indicate because of this informal economy. Apparently, the increase in the VAT rate to 20% seems to be correlated with a jump in the amount of cash in circulation, as cash-in-hand becomes the norm even amongst the normally law-abiding middle class. The number of us PAYE wage-slaves is decreasing as more people become self-employed (at some point in the next few years, the number of self-employed people in the UK will exceed the number of government employees) and this has major implications for fiscal policy.
Which means, despite the fact that the use of currency in the legal economy is dwindling due to advances in cashless payments, the world still remains hopelessly addicted to cash for black economy reasons.
How much longer can cash be tolerated? As the burden of taxation falls squarely on the backs of those of us honest enough (or dim-witted enough) to pay electronically, and as that burden will increase disproportionately as the informal economy grows, when are we going to storm the note-issuing department of the Bank of England shouting “I’m mad as hell, and I’m not going to take it any more’ ?!
“CASH”, wrote Marcus Felson, an eminent American criminologist, “is the mother’s milk of crime.”
I suppose the average middle-class reader doesn’t regard actively conspiring with their builder to defraud the authorities and raise my tax burden to be a crime, but it is. And the scale of the crime is enormous.
For the government, the annual value of under-reported taxes in the United States is $400 billion to $600 billion. According to the national taxpayer advocate’s estimates, 52% of this gap is because of under-reporting by self-employed taxpayers. If even half of this under-reporting is directly enabled by a cash economy, the U.S. Treasury loses at least $100 billion annually because of cash.
But we shouldn’t be mad at the Bank of England and the US Bureau of Engraving and Printing only because of crime. Although that is reason enough to get rid of cash, there are other good reasons for changing government policy to actively manage the stuff into oblivion.
First, it would eliminate the zero bound on policy interest rates that has handcuffed central banks since the financial crisis. At present, if central banks try setting rates too far below zero, people will start bailing out into cash. Second, phasing out currency would address the concern that a significant fraction, particularly of large-denomination notes, appears to be used to facilitate tax evasion and illegal activity.
As that piece in the FT notes, getting rid of physical currency and replacing it with electronic money would kill both birds with one stone. Why are we waiting?