Using Cash Can Keep the Tax Collector In the Dark

One way of taking resources from the government is to engage in economic transactions that are not easily-traceable: for instance, by paying directly in cash.

When you pay for things in cash, you make it easier for the recipient to evade taxes on the income or sale. Although the government could respond to this by raising the tax rate on the people it does catch in its net, such an approach increases the financial incentive for evasion and can serve to make the government’s problem worse overall.

In Greece, for example, restaurants and bars will often simply tell patrons the amount of the bill rather than writing up a formal receipt. Then, if the patrons pay in cash, the businesses will pocket the money but never put the transaction on the books.

Greece has recently responded to this form of evasion by telling patrons that they are free to refuse to pay the bill unless it comes in the form of a paper receipt — they can just walk out the door with a free lunch, legally. Fortunately, the social norms against cheating people who feed you are pretty strong, so people so far seem to be more inclined to continue to help assist tax evading businesses than to get government-approved freebies at their expense.

An ex-waiter in the U.S. explained that you can help waiters there evade taxes by paying tips in cash:

Cash tips are easy to under-report. …most people pay with credit card/debit card and that the goverment now uses a percentage method for tips. They look at the charged meals, look at the number of total meals served, and then look at the charged tips to figure out how much cash tips you recived.

(100 meals served. 50 payed with card, tipping 15%. the goverment caculates 15% from 100 meals even if cash tips are only 10%)

You can help out by tipping more when paying with cash or better yet, when you pay with card, put 1% tip on it and put the rest out as cash. I even leave a note for the server saying “this is your money, don’t tell your boss, or the goverment. share it with the busboy if that is the policy.” This will help lower the average tip figures, but still give the nice server what they have earned.

It is inherently difficult for the government to discover just how much it loses because of its inability to tax cash transactions. At one point the U.S. government estimated that only 68% of business income that can be off-the-books ever gets reported to the IRS — that drops to less than 50% for sole proprietors. Certain categories of “informal suppliers” who work off-the-books on a cash basis are thought to declare only 20% of their income (and many of them, I suspect, declare the income in order to qualify for tax credits, rather than to subject themselves to income tax).

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