Tax Evasion Policies and the Demand for Cash

60 Pages Posted: 30 Aug 2021

Date Written: August 5, 2021

Abstract

This paper analyzes the relationship between cash and tax evasion by studying the effects of two measures to fight evasion: accessing taxpayers’ banking data to check the consistency with reported income and discouraging the use of cash with thresholds on payments. We show that variation in cash holdings triggered by these policies can be substantial, about 1.5% of the GDP. Accessing taxpayers’ banking data generates a conversion to the highest denomination banknotes, the most efficient for storing (and hiding) value. Sanctions on payments above a certain threshold are effective in decreasing cash inventory. Exploiting dynamic spatial heterogeneity in tax evasion and cash demand, we find that access to banking data has a higher effect in regions more inclined to evade taxes. No substantial difference is found for the effect of cash thresholds. We rationalize such evidences using a simple model of tax evasion and payment choice, which casts doubts on the effectiveness of such policies.

Keywords: cash demand, payment systems, tax evasion and avoidance, fiscal policy, monetary economics, financial stability, deposits

JEL Classification: E41, E42, E62, E65, E71, H26, O17.

Suggested Citation

Rainone, Edoardo, Tax Evasion Policies and the Demand for Cash (August 5, 2021). Available at SSRN: https://ssrn.com/abstract=3899781 or http://dx.doi.org/10.2139/ssrn.3899781

Edoardo Rainone (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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