Fiscal Consequences of Scrapping Cash

March 30, 2014

This research examines the impacts of eliminating cash in Canada from the fiscal perspective of the government. The scrapping of traditional cash would mean the removal of the means of anonymous exchange with far-reaching implications for the fiscal deficit of the government.

A trade-off is involved. On the one hand it would mean a loss of seigniorage for the federal government. On the other hand it would reduce tax evasion, which would increase fiscal revenue of national, state and municipal governments. The absence of an anonymous means of exchange also has favorable fiscal implications, from reduced spending on law enforcement to legal proceedings, incarceration, and public health from impeding the drug trade. Digital media of exchange provide a trail to follow for illicit transactions, hindering activities of buyers and sellers.

This paper calculates the size of the fiscal implications of scrapping cash and finds substantial gains for all levels of a nation’s government, even the national government that loses seigniorage. It takes the view of Canada where virtually every adult has an account at a financial institution.

The total loss of seigniorage for the federal government is estimated at C$4.35 billion a year. Against the loss of seigniorage, however, the government is expected to gain from (i) increase in income tax revenue due to reduction in hidden income, (ii) increase in sales tax revenue due to reduction in hidden sales, and (iii) reduction in health care, policing and law enforcement costs due to reduction in illegal drug trade.

Scrapping cash in Canada would reduce hidden income and hidden sales. The total increase in income tax revenue in Canada is estimated at C$16.1 billion, with C$10.74 billion accrued at the federal level, and C$5.36 billion at the provincial level. The total increase in sales tax revenue in Canada is estimated at C$3.17 billion, with C$1.22 billion from increase in goods and services tax (GST) and C$1.95 billion from provincial sales tax (PST). Total increase in tax revenue is therefore estimated at C$19.27 billion in 2010.

The illegal drug trade in Canada incurs significant costs due to drug related premature deaths and health problems (lost productivity), and large numbers of criminal offences (estimated at 22.1% of total in 2002) with all the associated healthcare, law enforcement and incarceration costs. Assuming the illegal drug trade can be reduced by half as a result of scrapping cash in Canada, the combined cost savings in health care, policing and law enforcement at the federal, provincial and municipal government levels is estimated at C$3.02 billion.

The net fiscal benefit to the government in Canada (subtracting the loss in seigniorage) is estimated at C$17.94 billion in 2010, which is equivalent to approximately 50% of the federal fiscal deficit for the budget year of 2010/2011, or the equivalent of 1.1% of the GDP in 2010.

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