ATHENS, Ga. — There’s nothing quite like holding a wad of cash, but researchers from the University of Georgia conclude that average American families would be far better off if the U.S. eliminates all paper money. There’s one catch however, which is that the government also needs to lower certain taxes.
The gist of the study is that if America phases out cash money, the Internal Revenue Service will need to lower or even eliminate some taxes due to less tax evasion. Researchers explain that physical currency can change hands without Uncle Sam finding out. The same can’t be said for credit card and online transactions.
“Our analysis of the costs and benefits of proposals to eliminate currency implies that doing away with big bills like $50s and $100s could benefit the average person, even though they like using cash,” says study co-author William D. Lastrapes, the Bernard B. and Eugenia A. Ramsey Chair of Private Enterprise in the Terry College of Business, in a university release. “Less cash means less tax evasion, so the government can reduce other taxes.”
Without tax relief, cash is still king
Study authors used a technique called macroeconomic modeling to predict how eliminating cash money may change Americans’ lives.
The model largely works by looking for trade-offs. For example, when people use cash to hide their income and avoid taxes, it results in the government losing out on funds that could go towards public services or to pay down government debt. Simultaneously, however, tax avoidance through cash also essentially lowers tax rates for consumers and businesses – ultimately leading to greater capital and productivity.
So, while the government obviously does not approve of tax evasion via paper money, this practice can actually provide a boost to the greater economy.
When researchers applied their model to a scenario with no more paper money, the predictions show Americans would be far worse off. People would have to report every single cent of their income, which would be great for the government but not so much for public productivity and privacy.
Importantly, however, study authors report that if the government also reduced statutory income tax rates it would offset the disappearance of cash. In fact, the model concludes the average American household would be better off financially.
Low-income Americans may still struggle
It’s essential to note that these conclusions apply only to the average, middle-class American family. Researchers say if their model factors in lower-income households, which are often more dependent on cash, the outlook wouldn’t be as positive. Still, the research team believes there are ways the government could step in and help lower-income families.
“You’re going to have to provide them with some offset,” Lastrapes concludes. “What we’re suggesting is to take cash away but reduce taxes. It turns out this more than just compensates for not having cash, but it can actually make people better off.”
“My co-authors and I will be the first to admit that our paper does not provide the final word on cash-suppression policies and that more research is needed to be confident in what should be done. But our view is that models like ours that account for many of the unintended consequences of such policies and that carefully measure overall costs and benefits are essential for determining the right path.”
The study appears in the journal European Economic Review.