Fiscal consequences of scrapping cash

Abstract

The emergence of a range of digital media of exchange such as debit cards, credit cards, pre-loaded transport tickets, cafeteria passes and telephone coupons means for the first time that money in the form of paper currency and coins is no longer essential. The scrapping of traditional cash would mean the removal of the means of anonymous exchange with implications for the fiscal deficit. On the one hand, it would mean a loss of seigniorage for national governments, with the size of this loss depending on how the cash is removed from circulation. 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 favourable fiscal implications from reduced spending on law enforcement, 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.