Paul L. Caron

Monday, March 10, 2014

Kahn & Polsky: The End of Cash and the Income Tax

Jeffrey H. Kahn (Florida State) & Gregg D. Polsky (North Carolina), The End of Cash, the Income Tax, and the Next 100 Years, 41 Fla. St. U. L. Rev. 159 (2013):

The income tax is technologically very similar to the way it was in its early years, and technological developments have been at the margins of the income tax and have not affected its core elements. Still, technological improvements have made third-party reporting and withholding more efficient, which has allowed these mechanisms to become more pervasively used. Technology has also made it easier for taxpayers to substantiate their activities. These changes have facilitated the evolution of the income tax from its original class tax to the mass tax it is today.

While further technological advances might improve the federal income tax, it could have the opposite effect by paving the way towards its elimination. One particular type of technology — payment systems — has the potential either to fortify the income tax or to destroy it. Payment systems technology (e.g., electronic payment systems) could eventually shrink the cash economy down to an immaterial size and perhaps even make cash as obsolete as payphones. These developments would fortify the income tax by reducing the large part of the “tax gap” attributable to unreported cash income, which would result in increased fairness and efficiency, greater confidence in the tax system, and improved taxpayer morale. But payment systems technology, instead, could destroy the income tax by easing the transition from the income tax to a consumption tax.

This essay, written for the Florida State University College of Law's symposium on the 100th anniversary of the federal income tax, examines the possible effects that moving to a cashless society would have on the federal tax system.

Scholarship, Tax | Permalink


Balancing the budget using only a consumption tax would require a tax rate in the neighborhood of 30%. That would be a huge incentive for sellers and buyers to cooperate to find a way around the tax, whether by using cash or by some other means. That's the primary flaw in this author's scenario.

Furthermore, I'm not convinced that the problem of the cash economy is as large as claimed. It's reasonable to presume that sellers in the cash economy give price reductions of half or more of their tax savings. True, the buyers and the sellers get the benefit of this "tax", rather than the government, but the benefits are very widely distributed and largely focused on people with lower incomes. It's hard to argue that the government would do a better job of spreading that money throughout the population.

If the government ever manages to end the cash economy, we may discover that while revenue increased it's not an improvement on balance.

Posted by: AMT buff | Mar 12, 2014 10:30:08 AM