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A cashless economy as a bulwark against fraud and tax evasion?


It was Ken Rogoff’s most controversial theory: economies should ban cash in order to address tax evasion and place every single transaction on their radars. By doing so, the rich would no longer be able to hurdle suitcases packed with bills onto airplanes and fiscal justice would be resumed. But the theory has many holes.




With cash being the only truly private transaction method, and requiring no third party, cash opponents were quick to identify it as the mother of all sins, including tax evasion. Ken Rogoff and a handful of other visionaries suggested that eliminating cash would help fighting the underground economy and suppress anything from undeclared work to fiscal evasion by rendering all transactions visible and monitored by government agencies. Bloomberg reported in 2016: "I'll admit, it's a very quirky topic," Rogoff said at a press lunch on Tuesday put together by the publisher of his new book. But he insists that a country without most cash is an idea whose time has come.” Even if the question of privacy, civil liberties and totalitarianism were overlooked in the interest of feasibility, the prospects of such a theory are dubious.
 
The first objection made to this theory pertains to political principles: are innocent civilians to see their liberties curtailed for the misdealings of a minority of wrongdoers, especially considering that large-scale tax evasion comes more from large businesses than from private individuals? Moreover, despite cash still being used widely in North American and European societies (with some countries more than others), the trend of undeclared labor has been steadily decreasing over the long term, with society simply accepting the idea of taxation increasingly. Moonlighting is, by essence, difficult to document and quantify, but judging from the steady increase of taxation levels across Europe and America , undeclared work has not been on the rise - quite the opposite. Of course, undeclared work has not completely disappeared, and probably never will, but its levels are now less of a threat to the overall system than they have ever been. So, the question is: while the overwhelming majority of citizens are law-abiding and pay their taxes dutifully, should their economic freedom be hampered because a financial device is being judged by its misuse?
 
The second problem with the theory is that it would probably completely miss its target. Long gone are the days when cash was king and was used primarily to evade State control. With international regulations bridling cash transfers across borders, cash is simply no longer practical to move significant amounts, because it exposes to excessive sanctions, or requires the amount to be broken down into many parts. Over the past decade, as recent revelations showed, tax evasion has shifted into the electronic world and largely abandoned cash. The Accounting Degree review says : “It’s a sad fact that most of the methods used by the top 1% to evade the taxman are, if not moral, at least allowed within the letter of the law”, and therefore use legitimate ways to funnel out funds - and not illegal cash transfers on airlines. The ways to avoid declaring transactions are many, today, and cash is the least of them.
 
As for international tax evasion, specifically, attacking cash and moving all transactions to the banking system would be pointless. Most of tax evasion already uses the banking system, and not cash. The main methods rely on shell companies, and rapidly moving funds. By setting up a network of shell companies in countries known for their lack of compliance for international requests, tax evasion organizations are able to move the money far quicker than it would take investigators to track it. A single foreign shell company can also be used, using the “contract penalty method”. This method enables unlimited funds transfers, and front-men and middle-men, like other “sham methods”.
 
More generally, Mariam Isa reports that “at least 366 companies in the Global Fortune 500 index operate one or more subsidiaries in tax haven countries, according to a 2017 report by the Institute on Taxation and Economic Policy, a Washington-based think tank.”  Thus, loopholes hugely exceed any performance which cash could ever yield, which has therefore been relinquished for purposes of tax evasion. Isa illustrates the trend, reporting that “analysis from researchers in Denmark and the US showed that just 11 tax havens absorbed $616bn in corporate profits last year alone, as companies used legal loopholes to move money away from more costly domestic tax regimes.”  
 
Finally, crypto-currencies, such as the famous Bitcoin, are proving a tricky challenge for tax authorities. Using blockchain technology, crypto-currency designers have designed a currency which is secure, and anonymous. Moreover, the crypto-currency being by essence decentralized, traditional state authorities are no longer able to address one central bank or organization and subdue it into submission. Kai Segwick recently reported for Bitcoin News: “U.S. citizens have known for some time that the IRS has been shining its spotlight on the crypto space. The first flickers emerged over a year ago, after the tax body subpoenaed Coinbase for its user data in a case that wound up in the courts before the IRS ultimately prevailed, securing the details of over 15,000 exchange customers. That spotlight has gotten discernibly brighter now that the IRS has successfully enlisted heavyweights with the tools and skills to pry into blockchain activity.
 
Attacking cash for reasons of tax evasion would be fighting a useless battle and causing much collateral damage on the way. Cashless societies will do little or nothing to address tax evasion, because tax evasion relies little or not at all on cash. It will, however, punish law-abiding taxpayers who do use cash, needlessly.



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The cashless society from an ethical point of view

The debate about the move towards a cashless society has been at the center of the scene for several years, now. Various angles have been taken by economists, politicians, banking institutions and sociologists. Beyond the technicalities of the debate, lies the question of freedom, of inter-citizen solidarity and of governmental responsibility. The debate cannot remain in the hands of financial specialists, it is first and foremost an ethical, political and societal issue.

The cashless society from an ethical point of view









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