Switch to Cash

You can withhold resources from the government by making your economic transactions less easily traceable: for instance by using cash instead of checks, bank transfers, or credit cards.

When you pay with cash, you make it easier for the recipient to evade taxes on the income or sale. Although the government can respond to this by raising the tax rate on the people it does catch in its net, that approach diminishes taxpayer morale and increases the financial incentive for evasion, which can make the government’s problem worse on the whole.

Example Greek Restaurants

In Greece, for example, restaurants and taverns 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 and never pay taxes on the earnings. The government of Greece responded to this form of evasion by telling patrons that they are not obligated to pay a bill unless it comes in the form of a paper receipt—they could just walk out the door with a free lunch, legally. Fortunately, the social norms against cheating people who feed you are pretty strong, and patrons so far seem more inclined to help assist tax evading businesses than to get government-approved freebies at their expense.

Example United States

An anonymous ex-waiter in the United States explained one way you can help wait staff in that country to lower their taxes. When reporting tips to the government, he says, restaurants look at the tips reported on those receipts that were paid for by credit card to determine an average tip. They then apply this average to all of the tables—cash and credit—that were served by a particular waiter: “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 received.” He suggests that when you pay by credit card, put a 1% tip on it and then pay the rest of the tip in cash, so as to skew the average.

It is difficult for governments to determine how much they lose because of their 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 Internal Revenue Service—and 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 by the agency 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).

Notes and Citations

Nikolas, Katarina “Greece attempts to tackle fraud: No receipt, no obligation to pay” Digital Journal 31 December 2012
Drill Sgt K “Re: Paying Taxes” The Claire Files 2 September 2005
National Taxpayer Advocate 2005 Annual Report to Congress, p. 55