[Dave Birch] Having started to fill out my online tax return, and having read a lot about tax in the newspapers over the weekend…

HMRC admitted last week that 4.3 million people were in line for tax rebates because they overpaid a total of £1.8 billion in tax between 2008 and April this year. A further 1.4 million face demands for repayment because they paid too little.

[From 10 million in line for rebate after tax fiasco – Telegraph]

..it reminded me that not everyone is paying their share. The European Central Bank (ECB) is making some decent money from cash, but it may be at other peoples’ expense.

Gangsters, drug dealers and money launderers appear to be playing their part in helping shore up the financial stability of the euro zone. That’s thanks to their demand, according to European authorities, for high-denomination euro bank notes, in particular the €200 and €500 bills. The European Central Bank issues these notes for a hefty profit that is welcome at a time when its response to the financial crisis has called its financial strength into question.

[From Drug Dealer’s Bill of Choice Boosts the Euro Zone – WSJ.com]

Well, I suppose in these difficult economic times then every little helps as far as the central bank is concerned, but I wonder if the morality of this operation isn’t a tiny bit suspect?

The high-value bills are increasingly “making the euro the currency of choice for underground and black economies, and for all those who value anonymity in their financial transactions and investments,” wrote Willem Buiter, chief economist at Citigroup, in a recent research report.

[From Drug Dealer’s Bill of Choice Boosts the Euro Zone – WSJ.com]

When I interviewed Willem for our Tomorrow’s Transactions podcast series, he said that no €500 has ever been used for an honest transaction! You would think that there would be considerable pressure from cash-strapped European governments to start removing high-value banknotes from circulation in an attempt to reduce crime and fraud, or at least increase its cost. Never mind drug dealing, plain old fraud is a massive problem, and it means that honest taxpayers such as me end up having pay more to cover for the fraudsters.

VAT fraud is a serious problem in the EU; losses in VAT receipts from fraud are estimated to be around 10% every year.

[From Combating tax fraud and harmful tax practices: Commissioner Šemeta welcomes two important agreements in ECOFIN]

The fraudsters, by the way, are having a field day. Any new system introduces new opportunities for fraud, and the EU is not short of new systems.

European authorities believe the EU has lost at least €5bn to carbon-trading VAT fraud in the last 18 months. Europol, the EU’s law-­enforcement operation, fears the fraud will be used in other areas, especially gas and electricity trading markets, after criminals found VAT fraud was one of the most lucrative financial frauds… The fraud occurs when carbon credits are bought and imported tax-free from other EU countries, then sold to domestic buyers, charging them VAT… The three Britons allegedly set up a firm in Tournai, in west Belgium, which bought the credits in Britain and sold them on to banks via an intermediary, pocketing the 21% VAT charged in Belgium.

[From Three Britons charged over €3m carbon-trading ‘carousel fraud’ | Business | guardian.co.uk]

As national treasuries deplete, surely someone is going to eventually start wondering if the cash itself (in the form of high-value notes), rather than the rules about tax, that is the problem. All around the world, monetary authorities issue high-value banknotes to earn seigniorage and then lose far more than that seigniorage to crime and fraud. I understand that in Korea the new 50,000 Won bills introduced last year have made their way out of circulation and are primarily used for gambling, and I’m sure that’s not the only example of banknotes that are simply never used as a circulating medium of exchange but only as a store of value outside the formal economy.

This isn’t a European phenomenon, but in Europe the authorities are starting to tighten up because of the pressing need to shrink the less-formal sector of the economy and raise tax revenues. Greece will soon have the most stringent restrictions.

Effective January 1, 2011 every transaction above 1,500 euros will be considered illegal if it is done in cash. Transactions will have to be done through debit or credit cards.

[From EconomicPolicyJournal.com: Greece Bans Cash Transactions Over 1,500 Euros]

Italy, too, has begun to reduce the limit on cash transactions.

In an effort to crack down on widespread tax evasion, the government will ban the use of cash in transactions over 5,000 euros, lowering the ceiling from 12,500 euros

[From Italy austerity budget to cut wages and hiring | Reuters]

In the UK, as in many other countries, the limit for cash transactions (before parties need to file some kind of paperwork) is still £10,0000 but surely it can only be a matter of time before the cash-strapped British Treasury starts to press for this limit to come down, at which point the Bank of England ought to be stopped from issuing any more £50 notes (the main source of the growth in M0 in recent times). That ought to put a stop to this kind of dastardly crime…

The unnamed man planned to leave the cash in the local church cemetery until the 20-year time-limit for tax investigations had passed, before digging it up. But his ruse was uncovered by tax-inspectors who obtained permission to dig up the grave from the parish priest following a tip-off… The cash was discovered and the Inland Revenue recovered its £50,000 share.

[From Businessman hid £140,000 in his aunt’s grave in tax-evasion scam – Telegraph]

I’m not sure if I actually believe this story, because 20 years’ interest on the 140 grand less tax (even at 40%) would come to more than 140K, so either the “businessman” in question didn’t understand compound interest or the story is not actually true and has been misrepresented in the newspaper report in some way. But anyway, the rationale for allowing high-value bills to circulate is surely flawed and the one obvious way for me to pay less tax would be for everyone else to pay theirs.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

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