Taxing Cash
![handle is hein.journals/colujoutl4 and id is 65 raw text is: TAXING CASH 65
Taxing Cash
Ilan Benshalom*
Abstract
The cash economy enables, or at least significantly simplifies, many tax evasion
schemes. This is not surprising; after all, cash transactions can go unreported and
therefore remain concealed from both regulators and creditors. The tax collector
operates as both a creditor and a regulator, which means that cash transactions impose
negative externalities on tax collection and administration. These externalities could be
corrected through a relatively simple Pigovian tax that would be imposed, prior to
cash-mediated transactions, every time cash was withdrawn from the financial system.
Tax authorities would not collect any tax when cash would be deposited.
This article argues that such a cash tax would make tax collection both easier
and more accurate. If a cash tax were imposed, most of the legitimate economy would
shift to non-cash exchange methods. In such a setting, cash transactions would be
effectively limited to two categories: low-value transactions and transactions that benefit
from the anonymity associated with cash. Transactions associated with tax evasion and
other types of criminal activities likely comprise most of the latter category. Hence,
because cash would comprise a relatively small portion of the formal economy's
turnover, there are good reasons to believe that cash owners operating in the
underground economy would be unable to roll over most of the cash-tax burden. This
means that most of the cash-tax incidence would fall on those who use cash to engage in
tax evasion or other forms of unreported behaviors. Such a cash tax would therefore
reduce the lack-of-tax benefit associated with cash-based tax evasion along with the
inequities and inefficiencies associated with it. Furthermore, it would allow
policymakers to comprehensively address the externalities associated with unreported
transactions in the cash economy.
*Associate Professor, Hebrew University Faculty of Law, Jerusalem, Israel; Fellow, Taxation Law
and Policy Research Institute, Monash University; LL.B Hebrew University; LL.M University College,
London; LL.M & JSD, Yale Law School. I wish to thank Ben Alarie, Reuven Avi Yonah, Judith Freedman,
Sharon Hannes, and Doug Shackelford for sharing their thoughts with me about the project. Special thanks
are in order to the participants of the faculty workshop at the 2012 UNC Tax Symposium, Hebrew University
Faculty of Law, and the participants in the tax session of the Canadian Law and Economics Conference held
at the University of Toronto Faculty of Law. Most of all I wish to thank Gadi Benshalom, David Gamage,
David Gliksberg, Alex Kaganov, Rick Krever, Debra Lefler, Suzie Morse, Jacob Nussim, Avital Paul-
Benshalom, Chris Sancherico, Dayna Snyder, and Joel Slemrod for their detailed and very thoughtful
comments. Finally I want to thank Michael Wolynski and the rest of the Columbia Journal of Tax Law for
their diligent work, thoughtful remarks, and patience.
2012]](ViewImageLocal?handle=hein.journals/colujoutl4&div=4&collection=&method=preview&ext=.png&size=3)
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Taxing Cash
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Taxing Cash
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