cash rules

(a possibly apocryphal exchange between British Prime Minister Churchill and an unnamed socialite woman, which demonstrates that anything (or anyone) can be bought for the right amount of cash):

Churchill: Madam, would you sleep with me for five million pounds?
Socialite: My goodness, Mr. Churchill… Well, I suppose… we would have to discuss terms, of course…
Churchill: Would you sleep with me for five pounds?
Socialite: Mr. Churchill, what kind of woman do you think I am?!
Churchill: Madam, we’ve already established that. Now we are haggling about the price.

What if I told you a surefire way to save somewhere from 6% to 10% on every purchase you make that was illegal but hard to get caught at? And before you answer too quickly that you’d never do anything illegal, have you ever exceeded the speed limit while driving? I’m talking about the cash economy.

If you think you live in a place with no cash economy, you don’t get out enough. Here are a few examples:

  • If you hire a nanny, you need to pay social security taxes and so on. Many people choose to pay cash to avoid taxes, illegally.
  • If you buy a big ticket item (jewelry is a common example) you can pay cash and avoid sales taxes – illegally.
  • Offering to pay a cab in cash rather than having him run the meter is an example of a common cash transaction.
  • Waiters and waitresses.. working for cash tips and then failing to report those tips as income.
  • Many people buy services or goods with cash so that neither the purchaser nor seller have to report the transaction for tax purposes – for example, paying a yard cleaning service in cash so they can underreport their income.

This is definitely an illegal practice. It is also definitely happening, every day. In New York City, where I work, it is widespread.  In certain parts of town you hear that almost all transactions have “legit” and cash components. Why does this happen so often, and does it really hurt anyone?

Let’s say Jarvis sells jewelry. He has a $5000 ring that he’d like to sell. The sales tax rate in NYC is 8.375%, resulting in sales tax of $418.75! Now Jarvis knows that his ring is just as nice as Carl’s, but Carl is selling his for $4700 plus tax. Unfortunately for Carl, he’s an honest guy, so the cost of his ring with tax is $5094. Jarvis decides to sell his ring for cash. He risks getting in trouble with the law, but he can easily undercut Bart and also offer a bargain to the customer by selling his ring for $5000, cash. Who doesn’t like saving $419?

The state and Carl, that’s who. Those tax revenues of course go to fund many of the great public services of New York City, as well as many ridiculous wastes of money. Whether or not you view taxes as a good use of money is irrelevant – paying them is the law of the land. Jarvis possibly drives Carl out of business with his practices, therefore depriving the state of even more tax revenue. The state then has to investigate and sue Jarvis, using up even more of the state budget… you get the picture.

Using cash to pay illegal immigrants to be nannies or day labor or whatnot is another example of the cash economy. This is a horrible burden on the US economy. It keeps honest businesses who seek to pay minimum wage uncompetitive and it exploits the immigrants who may not know any better (or have any other choice). The treatment of immigrant labor is worthy of a whole separate post, but suffice it to say that it is not doing anyone any favors, except the greedy company seeking to exploit people by breaking the law.

You will probably hear some politicians make the once-every-four-year battle cry for a consumption tax during the presidential campaign. To me, the idea of a 20% value added tax (or sales tax or whatever you choose to call it) is ridiculous beyond describing. In New York alone, half the economy would go underground overnight. If I was buying a $5000 ring and had to pay $1000 in taxes on it I would definitely be motivated to at least consider my “black market” options. Any politician who proposes this simply doesn’t understand how the cash economy – which exists and is thriving – would explode in the US and create a legitimate “black market.”

So would you be willing to pay cash to avoid taxes? Have you ever? I think everyone has to answer the morality of cash transactions for themselves, but the cash economy is there, it’s strong, and it provides a huge savings to anyone who is willing to assume the risk of entering it.  I think it’s terrible that it exists, but it’s a natural result of higher and higher sales and payroll taxes over the years.