This cost of cash perspective was co-authored by The Fletcher School, Tufts University academics: Bhaskar Chakravorti, Senior Associate Dean for International Business and Finance, and Benjamin Mazzotta, Postdoctoral Research Fellow for Inclusive Growth
Since the 1950s, cash has faced serious competition for point-of-sale payments. Today, the digital transformation has accelerated that competition, just as film and vinyl lost market share to digital media. America’s transition in payments has been slower than in Sweden, where cash lost half its market share to payment cards in twenty years. Yet it has also been faster than cash-heavy markets such as Greece, Italy, Mexico and Spain. Why? Is there “trapped value” in the stickiness of cash? Does it provide intrinsic benefits that no substitute can offer?
On closer inspection, there are hidden costs to continued cash use. Households face nickel and dime costs throughout the cash lifecycle in the form of fees and time spent accessing cash. For businesses, theft presents the largest source of costs. Main Street businesses will simply bear the risk, rather than hiring armored car service. And although the U.S. government spends money producing and distributing cash, by far the greater impact of cash is on missing tax revenues—known as the Tax Gap.
Taken together, these costs constitute huge allocations of resources. The Tax Gap dwarfs the discretionary spending of most executive branch departments. The cost of cash to the various stakeholders, consumers, businesses, and the government amounts to at least $200 billion in the United States. After defense, discretionary spending of the next ten United States executive branch departments averages $44 billion. So even if only 11% of the tax gap is due to cash transactions, that is still sufficient to fund a cabinet-level department of the United States Government.
Our research demonstrates the regressive impact of household cash-related costs. Unbanked individuals are four times as likely to pay fees to access their money and pay $4 more per month in fees for cash access. The “unbanked” (those without bank accounts) are 4 times more likely to pay fees to access their own money. Youth (under 25) carry substantially less cash than seniors (over 65) at every income level. These findings broadly corroborate excellent research by the FDIC on financial services for the unbanked and by the Pew Charitable Trusts on payday lending and sensible checking accounts. Entry-level payment instruments could be priced at low flat rates and backed by paid-in funds rather than credit.
Some governments have taken aggressive action to curb cash payments in the private sector. Recovering even a fraction of the foregone tax revenues could be a fiscal game-changer. Spain and Italy have forbidden cash payments above thresholds of EUR 2500 and EUR 1000. Mexico uses a tax on cash deposits to sweeten the value proposition for cards and electronic funds transfers. And in Korea, a similar tax incentive scheme encourages real-time tax reporting of cash transactions at the point of sale. Outright bans on cash transactions might be a bridge too far for ordinary Americans, but the fiscal impact of tax evasion should not be understated.
8 Comments
The largest cost in your ‘research’ (the government’s part) is a highly subjective estimation. And by far the largest cost to the customer is ‘time spent’ which is not a real cost. And the costs of the alternatives, both business and customers, have been left out. Have you ever seen a credit card without all the customer unfriendly fees and high interests and gimmicky sales tactics? And what about privacy? Do you trust your government to have your data free at hand, without any reasonable protection if they loose that data, as they regularly do. And closing the ‘tax-gap’ even a bit is tantamount to raising even more taxes from society as a whole, not very good for the economy. So I stay with cash.
@Jerome, hello and thank you for taking the time to read about our study. Governments will uniformly agree that they do not know how big the cash economy is. Some economists have estimated the size of the cash economy in different countries, but they do it indirectly because people won’t disclose undeclared income on government survey forms. When workers take cash under the table, they lose the workplace protections that most of us take for granted and the government loses tax revenue. I don’t advocate banning cash transactions over $1500, but Italy did just that. Respectfully, I must disagree with you on the issue of tax evasion. The government has been shut down and the budget sequestered because Congress cannot agree on how raise sufficient revenue to meet our budget commitments. Tax evasion forces the government to borrow, which raises the debt and saddles taxpayers with more debt service. We do our best to follow convention on the issues of privacy and leisure time. I have read several very good studies that compare checks to cash or cards to cash, and I can show you where to find them on the web.
@Jerome, hello and thank you for taking the time to read about our study. Governments will uniformly agree that they do not know how big the cash economy is. Some economists have estimated the size of the cash economy in different countries, but they do it indirectly because people won’t disclose undeclared income on government survey forms. When workers take cash under the table, they lose the workplace protections that most of us take for granted and the government loses tax revenue. I don’t advocate banning cash transactions over $1500, but Italy did just that. Respectfully, I must disagree with you on the issue of tax evasion. The government has been shut down and the budget sequestered because Congress cannot agree on how raise sufficient revenue to meet our budget commitments. Tax evasion forces the government to borrow, which raises the debt and saddles taxpayers with more debt service. We do our best to follow convention on the issues of privacy and leisure time. I have read several very good studies that compare checks to cash or cards to cash, and I can show you where to find them on the web.
@Ben. Absolutely ridiculous! A study about the evils of cash funded by MasterCard. “Some” economists have “estimated” the size of the cash economy? That is just outright wrong. I believe that cash is printed by the Federal Reserve in the US and they know exactly how much cash is out in circulation just as all other governments with National Banks do. The problem is when banks create money out of thin air when lending, and thus increasing the digital (read: fake) money supply allowing greedy bankers and Wall Street investors to speculate in financial markets. In other words making money of money which is just ludicrous when money is just a concept made up by us to use to make transactions easier. This made the banks too big too fail and the governments had to bail them out with us taxpayers getting left with the bill. That’s where the real problem lies, not in cash.
Neither the government not the banks can be trusted. Your money can simply disappear if left in the bank, particularly true of some countries.
Spending only the money in your pocket has a restraining value to make only necessary purchases. Using plastic, it is too easy to get in over your head as many people who have poor control with credit cards have sorely found out.
Another trick from the banks and Creditcard companies to tighten their grip on us.Do not fall for it !
Cannot help but wonder if Bitcoins (or other equivalents) will be the best way to have cash when central bankers play around with traditional currencies.