Underground-Economy Buster: Taxing the Use of Cash
A Proposal for Federal Government Program
DUE 1994-11-25
02 | Description of the Activity to be Restructured
Although the use of credit cards and debit cards is ever growing across Canada, the usage of cash is also increasing, paradoxically, due mainly to the proliferation of underground economy.
Most underground economic activities involve cash transactions. This original proposal is to change the definition of "cash" and allow the federal government to tax the use of cash in order to discourage the underground economy as well as to benefit from the increased efficiency of the overall Canadian economy through Electronic Data Interchange (EDI) and Electronic Fund Transfer (EFT) technologies instead of manual handling of cheque and cash (bills and coins).
The federal government has already adopted direct deposit for tax refund and some social program delivery, and has started accepting electronic filing of income tax by EFILE. This proposal could be considered a natural progression of the federal government's thrust for cost-effectiveness through computer and communications technologies rather than relying on paper and human labour. The private sector has almost universally adopted direct deposit and direct payment where available, as seen evidently in the increasing popularity of INTERAC debit card. Thus, Canada can win in the competitive global economy by pioneering the electronic commerce without compromising socio-economic life of Canadian citizens when the use of cash is taxed. The negative perception of this paradigm change can be overcome by the visionary leadership of the federal government.
The basic philosophy behind this proposal is "absolute simplicity and consistency", eliminating any intermediate process and automating the procedures. Such an approach to achieve total quality and global optimisation in a long-term solution requires careful planning.
A change in political/legal system is required in the form of new legislation and/or regulation. If this proposal is accepted, the author will devote time and resources to prepare a draft legislation and/or regulation.
03 | The Restructuring Plan
Phase 1 (1 year)
Go Simon Sunatori to draft legislation and/or regulation, and find a sponsor Member of Parliament.
Government of Canada to introduce a bill to tax the use of cash.
Revenue Canada to set up mechanism to collect tax from chartered banks and others.
Phase 2 (1 year)
Chartered banks to start collecting tax on the use of cash.
04 | Rationale for Restructuring
The tax on the use of cash may sound very radical, but Goods and Services Tax (GST) already applies to Canada Post stamps. This proposal is to change the definition of cash to a taxable government-issued certificate. The "cash tax" would be collected whenever the money is taken out of the bank in the form of cash. The private sector would be allowed to pass the cost of the tax on to the consumers only when cash transaction is involved. There will be no impact on the Bank of Canada's monetary policy since the definition of currency is not affected at all.
The concern that low-income and disadvantaged citizens would lose out can be addressed by mandating the federally-regulated chartered banks to guarantee every citizen the right to possess a debit card, and make a no-charge option mandatory. For example, Scotiabank does not levy any service charge for using INTERAC debit card with its PowerChequing account if a minimum balance requirement is met. Chartered banks themselves will benefit from such an incentive since the inherent processing cost of debit cards is much lower than that of cash which requires sorting, counting and transportation, among others.
Other benefits to the federal government include the suspension of any plans to introduce new and re-designed bills and coins such as the project to issue 2-dollar coins, thus reducing the operating cost of the Royal Canadian Mint. The metal recovered from excess coins can be sold off to the industry to generate extra government revenue. What's more, the taxpayers would not have to worry about losing money through rounding even if a 1-cent coin is phased out, as suggested by some economists.
One major advantage of the cash is anonymity. Since the proposal is not to eliminate the cash, those who prefer to remain anonymous can do so albeit with some extra cost. Therefore, the privacy is not compromised since it is just like an unlisted telephone number which the subscriber pays extra in order to be hidden from the public view. The emerging pre-paid card can also retain anonymity. As for security, the PIN number for the debit card is only 4 numbers long, but it has proven to be highly reliable compared to hand-written signature fraud in the credit card business, cash theft and bank robbery.
The debit-card experiment some time ago in the Ottawa-Hull region was quite successful, and the INTERAC direct payment system is now spreading throughout Canada. All merchants who accept major credit cards such as VISA and MasterCard are somehow "taxed" by the card-issuing companies in the form of a fee of 3 to 5 % or so each time a customer chooses a credit card payment. In addition, Canadian Tire stores, for example, give out 3 to 5 % coupon rebate when a customer uses cash as a method of payment instead of a credit card or a personal cheque. They could modify this scheme to give out a coupon rebate only when an INTERAC debit card is used, further discouraging the use of cash.
Ever since the debit card was introduced, the cashless society is almost a reality for me. I use credit/debit cards and direct payment/deposit for almost everything but the following which don't yet accept them: parking, MacDonald's, Burger King and the daycare centre. The last one is now considering accepting electronic methods. I recently began using electronic payment for Canada Post stamps, Bell Canada bills and bus pass as soon as they started accepting it.
Looking beyond the debit card and simple direct payment/deposit into the long-term future, digital money with DES encryption and RSA digital signature technologies will enable the consumers to do direct on-line shopping through virtual market place on the information superhighway. A glimpse can be seen in Apple's eWorld on-line information service.
