Cashless: The Coming War on Tax-Evasion and Decentralized Money
There are two major trends taking place that are shaping up as a recipe for disaster. On the one hand, we have massively indebted governments around the world desperate for tax revenues and, on the other, steadily growing multi-trillion underground economies whose main goal is to avoid paying them.
According to a recent study, the amount of uncollected tax revenues in the U.S. is estimated around a whopping 500 billion dollars per year1 enough money to bailout most of Europe.
At 8 percent of GDP, the underground or shadow economy in the U.S. is much smaller percentage-wise than other nations like Greece (25 percent), Italy (27 percent), or Thailand (70 percent)2, yet, given our overall size, America's untaxed economy is larger than “the official output of all but the upper crust of nations across the globe…bigger than the GDP of Turkey or Austria.”3
Question is: How long will the government allow this to last?
When times are good and the economy vibrant, there is less incentive to crack down on tax-evasion; but now, unemployment is at all-time highs, income and property taxes have fallen dramatically, and the government is supporting an increasingly large and record number of people through a wide range of benefits.
Desperate times call for desperate measures
In an interview with Jim Puplava titled “Never Underestimate the Desperation of a Broke(n) Government”, world renowned economist, Martin Armstrong, cites numerous examples of how the U.S. is following a well set historical pattern where, inevitably, the “government is going to be much more aggressive to tax people, chase them down, and put them in prison.”
Just recently, noted author and blogger, Charles Hugh Smith, cited how California a case-study for high taxes, regulation, and smothering bureaucracy automatically seized funds out of a previous resident’s bank account for not filing taxes in the year 2006 five years after he had long moved out of state. In response to this incident, Smith writes, “What is entirely believable is that the state of California, desperate for revenue, is churning out dubious income tax claims stretching back years and collecting the money without due process.”4
If true, and these types of aggressive acts are to become more common, it should be fairly obvious that they won't achieve the desired results. As taxes are raised, regulations and filing requirement made more stringent, more and more people will merely leave the system. Eventually, the government will have to think of a different way to collect.
We could change current tax laws and make it less burdensome but, when given a choice between simple or none, most people would rather choose none; and since many realize that by doing everything in cash their transactions are virtually untraceable, the risk of getting caught is quite tiny compared to the benefits of keeping much more of their income.
The only option left is to remove the very thing that fuels the underground economy in the first place.
Cash becomes illegal
Recently, best-selling financial author and well-known investor, Doug Casey, offered his perspective on this issue by pointing out that “governments hate cash for lots of reasons…it costs a couple of cents to print a piece of paper currency, and they have to be replaced quite often. As the US has destroyed the value of the dollar, they’ve had to take the copper out of pennies, and soon they’ll take the nickel out of nickels. Furthermore, with modern technology, counterfeiters including unfriendly foreign governments can turn out US currency that’s almost indistinguishable from the real thing. And the stuff takes up a lot of space if it’s enough to be of value. So sure, governments would like to get rid of tangible currency. They’d like to see all money kept in banks.”5
Italy or Sweden?
Aside from how governments personally feel about cash, some societies are choosing to abandon it voluntarily. As recently reported by the Associated Press, cash only represents 3% of Sweden's entire economy a trend that isn't being enforced through law but rather embraced by a strongly technological and innovation-loving people.6 No "headline-grabbing raids", automatic seizure of bank funds, or stopping luxury car owners to check their most recent tax returns. Then again, Sweden is also known for having the highest tax rates in the world.
Although the total amount of money changing hands in America's shadow economy is quite massive, again, with respective to our total economy it is fairly small about 8 percent of GDP. Given the sheer convenience and accessibility of electronic payment options almost everywhere you go, the transition towards a cashless society is certainly "in the cards."
However, given the diversity of America's population, our strong desire for privacy and longstanding hatred towards taxes, there will always be a strong demand for some form of cash or non-traceable currencies something I doubt the U.S. government won't try to supervise or restrict.
Resistance is futile. You will be assimilated
Given the trends taking place, a hot or cold war against non-traceable decentralized forms of currency is almost inevitable. Like Italy, the U.S. could hit such transactions head on and declare them illegal although not without a massive uproar. On the other hand, the government could take a more indirect and technological approach that forces compliance overtime.
Specifically, we should expect to see some form of the following if the U.S. made a goal of collecting the estimated $500 billion in potential tax revenues:
Obviously, if cash transactions were made illegal it would be very hard for anyone operating outside the system to freely exchange goods and services within the wider economy. However, it’s very easy to transfer cash balances onto a stored value card and then use that instead. Also, people could start using gold, silver, Bitcoins, or any other form of decentralized payment methods within various sub-networks.
For the second option merging all your information into a database this would further help in cutting down uncollected revenues but would also require voluntary participation by most non-regulated providers of goods and services. You would also expect to see a large number of costly and intrusive audits for those operating businesses on a cash-basis.
The last option slowly making it impossible to receive aid, loans, insurance would effectively strangle the shadow economy into submission and mitigate the chances of a revolution by declaring war on decentralized methods of payment. Incidentally, I believe a very eye-opening glimpse of what's truly in the works was revealed when the Social Security Administration released a report highlighting the Big Brother right-to-access approach in conjunction with various other government agencies.
Consider SSA seen going 90 percent electronic
There you have it: the merging of all your information (and money?) into one easily accessible electronic file. Want to get Social Security or other benefits? Apply for a loan? Get health insurance? You’re going to have to be part of the system. Otherwise, except to hear from the IRS!
April 6, 2012
Cris joined PFS Group in 2002. He holds a B.S. in Mathematics from California State University San Marcos. His professional designations include FINRA Series 7 & Series 63; and he is also currently pursuing the designation of Chartered Financial Analyst.
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