Monday, August 17, 2015

why government hates cash

My friend Ron passes along articles of a libertarian bent that come his way.  That's fair.  After all, I identify myself as being philosophically libertarian.

One of the most recent was a summary of a recent article by Joseph Salerno published in The Austrian -- a journal of the Mises Institute.  As you might have guessed, the article is entitled "Why Government Hates Cash."

A cursory glance at those elements would disclose the political provenance of the author.  The unusual use of the singular plural to designate "Government."  And, of course, the reference to Ludwig von Mises, the Austrian economist who brought libertarianism to the general public.  His Road to Serfdom is an economic classic -- and had the appropriate effect on my political development as a high school student.

The thesis of the article is that government -- in almost every country -- is taking positive acts to limit the use of cash in civil societies.  Several countries have passed legislation to limit the ability of citizens to pay their obligations in cash.

We have all heard the reasons.  Or, the stated reasons.  Just as FATCA was justified in The States, governments elsewhere claim the restriction of using cash is to limit criminal activity and to reduce the ability of citizens to cheat on their taxes.

Being a libertarian, Salerno words the purpose a bit differently.  "This gives the government greater abilities  to monitor and surveil citizens' private financial dealings and creates easier means for levying new taxes."

Two years ago, in peeling the people, I discussed the economic plans of President Peña Nieto to increase Mexico's tax rate relative to its GDP.  Of the 34 member nations in the
Organisation for Economic Co-operation and Development (OECD), Mexico's government takes the lowest percentage of GDP as taxation -- 18.8%.  The Scandinavian countries take over 40% -- some close to 50%.

eña Nieto came into office vowing to increase the taxation take.  Not to the dizzying heights of Denmark, but an increase of 6% -- about one-quarter of GDP.

To do that, the Mexican government took measures that would have made Salerno wince.  Cash deposits to a bank were penalized with an assumed tax.  Information of cash deposits were also shared with the tax folks, who followed up with presumed tax bills (the envelope please) to depositors.  In an attempt to encourage switching from cash, the programs merely encouraged switching from banks.

One of the biggest extensions, though, was a tax enforcement plan to collect the 16% VAT at restaurants.  For the past two years, restaurants who want to comply with the new law, have been working with the enforcers to ensure their accounting and reporting systems are working properly. 

All suppliers in the system are supposed to have the ability to produce an electronic factura (receipt).  The tax folk believe they will be able to catch tax cheats when they discover gaps in the receipt chain.

Last week I had dinner with a Mexican who owns a small restaurant in town.  He was complaining about the lack of services from the county.  He has been trying to get a street repaired.  To no avail.

I asked -- out of mere curiosity -- if he had been having trouble getting his reporting system to the tax people working properly.  His answer startled me.

"I'm not going to collect the tax.  I can't afford it.  My business is successful, but small."

When I asked him if that attitude was inconsistent with his complaint about not receiving services from the government, he just stared at me.  And when I asked who he expects to pay for those services, he just shrugged his shoulders.

Now, I know as a cardless libertarian, I should have felt empathy for him.  The history of governmental corruption in Mexico does not assure any Mexican citizen that most of his taxes will actually be put to a good purpose.

From an economist's viewpoint,
Peña Nieto's plan to increase the tax take may be laudable.  But I also understand the restaurant owner -- to a degree.  It is a bit like donating to a well-known charity whose CEO draws a salary that would make Croesus wince.  No one likes to feel as if he is the sucker in a con game.

What bothers me is that there are restaurants who intend to fully comply with the law and collect the appropriate VAT.  Those restaurants are then forced to compete with restaurants who are tax thieves -- handicapping their compliant competitors with a 16% additional weight.

For me, the equities are with the people who are complying with the law.  But if the government wants people to gain a bit of faith in the system, it might consider doing something to staunch the hemorrhaging of finances attributed to corruption.

I would be interested in hearing what the Mises Institute has to say about that.  But I think I already know.


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