Eliminating Banknotes: Policy Considerations for Australian Tax Evasion

Kathleen Clough

Research output: ThesisDoctoral Thesis

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Abstract

The cash economy is a complicated phenomenon that has a wide range of significant consequences for all stakeholders. The literature has included a variety of definitions and names—including shadow economy, non-observed economy, black economy, and underground economy—with different authors focusing on different aspects of this issue. The Australian Taxation Office (ATO) defined the ‘cash economy’ as “all legal transactions that [were] not disclosed and resulted in evasion of tax (Australian National Audit Office, 2006).” This was the definition adopted by this paper.
There are significant social and economic implications stemming from the existence of the cash economy. For example, its adverse consequences include reduced budget for the government with reduced tax revenue, lowered quality and quantity of public goods and services, a distortion in the competition within the market, the degradation of social and economic institutions, and stunted economic growth. An understanding of the wide range of negative repercussions stemming from the cash economy makes it important to revise past and current tax policies to address unreported taxable income—and constantly evaluate new solutions to effectively reduce the size of the cash economy.
A key component of the black economy is the preference of cash payments to facilitate the exchange of goods of services—the anonymity provided by cash aids the taxable sale to be concealed from tax authorities. The ability to conceal the transaction would be more difficulty if the exchange were facilitated via an electronic transfer or transaction card—both of which would have created an auditable documentary trail. Therefore, as cash dominated the black economy, a key focus of this study was to understand the link between cash and tax collections. This was achieved by examining three countries—India, Sweden, and the United Kingdom. These three countries were selected as case studies as they had notable changes to the access and use of banknotes in the ten years between 2009 and 2018. This study explored the hypothesis that a reduction in the use of cash, will in turn, diminish the opportunity to successfully evade income tax. This will result in a reduction in tax evasion, or an increase in the disclosure of taxable income.
This study explored the correlation between banknotes and tax evasion—and examined using the situational crime prevention theory whether there was an inverse relationship between the two. That is, the reduction in access and use of banknotes in turn will contribute to an increase in tax collected as the opportunity to evade tax is reduced.
This study explored the hypothesis that a reduction in the use of cash, will in turn, diminish the opportunity to successfully evade income tax, which will lead to a reduction in tax evasion, or an income in the disclosure of taxable income. The hypothesis drew on the situation crime prevention theory which focused on understanding the role opportunity played in motivating individuals to commit a crime. The theory posited that the appeal and availability of opportunities to evade taxes could be reduced if the probability of detection is increased through the abolition of banknotes.
The research question examined whether a reduction in the use of banknotes used for the purchase of goods and services, and payment of wages had an impact on the reporting and collection of taxable income. To evaluate this question, the study examined three counties—India, Sweden, and the United Kingdom, each experiencing a notable reduction in the use and reliance of banknotes in the ten years between 2009 and 2018. Key economic indicators for these selected countries, based on open-source data was collected, grouped, and analysed—with the objective of examining whether a reduction in the banknotes had an impact on tax compliance. As the size of the black economy cannot be quantified with accuracy, the focus on this study was to examine the growth of reportable taxable income from both the sale of goods and services, and the receipt of wages and salaries. Therefore, to test the question of whether an increase in cashless payments results in a reduction of tax evasion, the focus was on examining the amount of tax collected. Although the relationship between the black economy and cash payments had been broadly examined in the literature—the specific link between the use of cash and cashless payments and the tax revenue collected by governments through income and good and services taxes had not been investigated in empirical research.
For each of the three countries there was a correlation between the less reliance on cash to purchase goods and services and receive wages and an increase in goods and services taxes collected by the respective government authorities. An evaluation of the tax revenue as a percentage of GDP improved by 14%, 23% and 12% between 2009 and 2017 for India, Sweden, and the United Kingdom respectively ("World Development Indicators," 2008). This meant that the tax revenue collected by the respective government authorities, on average, increased at a greater rate than the growth of GDP—in other words, for every dollar collected from goods produced and service provided, a greater portion was collected in tax revenue. These results supported the hypothesis that a reduction in the use of banknotes will contribute to an increase in tax collected. This link can be explained by the situational crime prevention theory which assumed the attractiveness of tax evasion opportunities can be reduced if the risk of detection is raised (Clarke, 1980). The move away from banknotes increased the risk of detection as an audit trail is left for tax authorities to investigate. Therefore, the results obtained verified the hypothesis that the black economy may be reduced through the promotion of cashless payments, achieved by the abolition of cash.
Original languageEnglish
QualificationDoctor of Philosophy
Awarding Institution
  • Charles Sturt University
Supervisors/Advisors
  • Prunckun, Henry, Principal Supervisor
Award date28 Jul 2021
Place of PublicationAustralia
Publisher
Publication statusPublished - 04 Oct 2021

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