Risks of banking disintermediation and tax evasion
Given the ever present and growing trend of tax evasion an often raised objection is about citizens choosing to stay outside the banking system to avoid the BTT. One can claim that it will not be evaded because of two critical factors – it is at a low rate and because the deduction is automatic, it is far easier to comply than to evade! Let us look at what Prof. Cintra has written in response to this objection. He begins by highlighting the risks of non-banking transactions:
At a reasonable level of taxation, the tax savings obtained by avoiding the banking system, and thereby having to carry out business transactions in cash or barter, does not compensate for the resulting additional transaction costs such as cash storage and transportation, the lack of safety, the risks of counterfeits, the illegality of foreign currency transactions, etc.
In a well banked economy, it is hard to imagine a return to cash. Prof. Cintra elaborates on the slim possibility of “return to cash” as follows:
Likewise, how can anyone imagine that payments for all purchases and sales made in all the markets of the world could ever be made in cash? Would it make financial sense to anyone to make payments to suppliers and services at the cashier’s windows of the various commercial establishments, just to save a (small BTT) charge on the transaction? What would be the additional transaction cost of choosing to pay in cash? Security, physical displacement, transportation, opportunity cost for time spent in manual payment, and many other reasons would imply a significantly higher marginal transactions cost compared to the tax saving. Such a choice would mean the rejection of all present-day progress and a return to economic pre-history. Therefore, it is difficult to imagine that this scenario would occur.
The problems and challenges of cash economy are highlighted in Section 2.2. To meet this challenge, ArthaKranti BTT Proposal has as its integral part the withdrawal of higher currency notes as well as the removal of legal protection for cash transactions above certain specified value. With these changes India will indeed leap-frog into the modern era, comparable with other developed nations.
Another possible related objection could be the use of more modern instruments like eCash to escape such a tax. Prof. Feige writes about such a possibility as well as the most appropriate response to such a threat. He states:
·Every tax can be avoided and evaded (in theory). The question is, at what cost? Technological innovations such as the creation of anonymous forms of E-cash (digital cash) that represent a private digital substitute for the government’s present monopoly of issuing currency can raise collection problems even for an APT system. Such E-cash could cumulate and simply be transferred from party to party without returning frequently to the banking system. If anonymous private digital cash is permitted to substitute freely for government paper currency, it can function as a tax evasion vehicle.
Private digital cash also deprives taxpayers of annual seigniorage earnings of the Federal Reserve that are now returned to the US Treasury. Given these concerns it behoves the government to issue its own E-cash that would benefit from the natural network externalities that now accrue to paper legal tender. Under the APT system, the creation of private inside money designed to evade taxes would be illegal and treated as would be any attempt to counterfeit legal tender.
Page 72-75, Bank transactions: pathway to the single tax ideal A modern tax technology; the Brazilian experience with a bank transactions tax (1993-2007), by Cintra, Marcos, July 2009
Page 155-158, Bank transactions: pathway to the single tax ideal A modern tax technology; the Brazilian experience with a bank transactions tax (1993-2007), by Cintra, Marcos, July 2009
Page 23, Taxation for the 21ST Century: the automated payment transaction (APT) tax, October 2000, Edgar L. Feige