Suggestion of Cashless Society Is Fraught with Drawbacks, Olson Says

[1] Thank you for your letter to Secretary O'Neill dated November 1, 2002 outlining your proposal for fundamental tax reform. The Secretary referred your letter to me for response.

[2] You propose that all cash should be removed from our society, replaced by a system of completely electronic transactions. Each transaction would be taxed at a rate equal to 0.5 percent and the income tax would be eliminated. While this approach may appear on first impression to be simpler than the present system, we have a number of concerns about the concept that I'd like to share with you. First, although there would be many benefits to a cashless economy, we believe that creating a completely cashless economy would be impractical and inefficient. Moreover, the proposed tax would be inefficient and unfair. Millions of daily transactions are conducted using cash. Many of these would be costly and inefficient to try to convert to electronic form, and -- even in the face of government efforts to create a cashless economy -- would continue to be conducted using cash, cash substitutes, or barter. These transactions would constitute a continued "underground economy" that would avoid tax under the system proposed. We also believe that the tax would discourage economically beneficial financial transactions and encourage capital markets to move abroad. Further, it could be viewed as unfair in that individuals and businesses with similar incomes, assets, and activities could have large differences in tax burden.

[3] We are currently examining options for improving our tax system based on the objectives of simplicity, efficiency and equity. Reform can provide substantial economic benefits by reducing the compliance burden on taxpayers and reducing the role taxes play in economic decisions. This is a challenging task and we appreciate your taking the time to provide us with your ideas. As we analyze options, we will keep your ideas in mind.

[4] Again, thank you for your input and interest in tax reform.