Eurosclerosis: What the Greek banks want, and what it would mean in the United States

The Greek economic crisis hasn’t been talked about as much as it had been, but it still exists. From Greek Reporter:

Greek Banks Propose Tax on Cash Withdrawals to Curb Tax Evasion

By Philip Chrysopoulos | November 28, 2016

Greek banks have proposed taxation of cash withdrawals so that Greeks make more electronic transactions as a measure to curb tax evasion.

The proposal is sent to the ministry of finance for further review, the basic idea being that it would become expensive to use cash. The ministry is advising people to make more electronic transactions and is planning a program that would give people incentives to use credit or debit cards in order to battle rampant tax evasion.The proposals submitted by Greece’s largest banks include:

  • Mandatory use of cards or other electronic networks for transactions in professions where there is strong evidence of tax evasion, or where cash is used as the only form of payment.
  • Mandatory use of cards or electronic networks for transactions over a certain amount.
  • Reform the tax system by introducing a system of revenues-expenses. Households or professionals will only be taxed on the amount of income that is not spent. Thus, professionals and households will have a strong incentive to ask for a receipt on every transaction in order to increase their costs and have their taxes reduced.
  • Connect the tax-free income with the amount of expenditures paid by credit or debit card.
  • Make mandatory for all businesses, to make electronic payments and pay payroll electronically. Payments will also show if they are consistent with security contributions.

Well, thank the Lord that Hillary Clinton and the Democrats didn’t win in our recent elections, or we might be seeing something like this in the United States! We noted previously Patrick Gillespie’s article on CNNMoney pointing out that the plurality of economic transactions¹ in the United States are made in cash, and that there are good reasons for doing so. Every transaction which is made by something other than cash imposes additional costs, primarily on the retailer, and those costs can be a fairly significant amount of a small transactions. In the US, under regulations that went into effect in 2011, debit card transaction fees are capped at 21 cents plus 0.05% of the purchase price. The use of a credit card, rather than a debit, is more expensive; the potential fee difference for a $10 fast food purchase:

  • Credit Card: 2% of transaction ($0.20) + Transaction Fee (let’s use $0.50) = $0.70.
  • Debit Card: $0.21 + 0.05% ($0.01 rounded up) = $0.22.

The transaction fee is what makes the use of cards for small purchases so expensive for merchants. That 22¢ for a $10.00 meal is 2.2%, a fairly significant amount for a small business, and possibly the difference between profit or loss. If a credit card is used, 70¢ is a 7.0% hit on the merchant; that’s pretty high:

Full-service restaurants at all levels spent about 32 percent of each dollar on the cost of food and beverages, 33 percent on salaries and wages, and from 5 percent to 6 percent on restaurant occupancy costs. Profit margins, however, varied according to the cost of the average check per person. Those with checks under $15 showed a profit of 3 percent. Those with checks from $15 to $24.99 boasted the highest profit margin at 3.5 percent. Finally, those with checks of $25 and over had the lowest profits, at 1.8 percent.

Restaurants that accept plastic have to build those costs into their pricing, meaning that they are passing along those transaction costs to the consumer. The Greek bank proposed regulations would either increase costs to consumers, or reduce profit margins for small businesses if imposed here, and certainly would there as well.

But, let’s tell the whole truth: the Greek banks absolutely love those proposals, because banks and the card transaction firms make money every time those cards are used. In 2011, the Federal Reserve estimated that it cost banks 12¢ every time a Visa or MasterCard debit transaction was made, but that the banks actually collected 44¢ on each transaction. Of course the Greek banks want to force transactions further away from cash and more into electronic exchanges! The Greek Reporter article said that the banks had made the proposals “to curb tax evasion,” and perhaps they can justify their arguments that way, but it was really so they could make more money.²

There was one more paragraph in the article, which pointed out a big part of the problem in Greece’s economy:

According to bank records, the underground economy in Greece is estimated to be around 40 billion euros and the loss of tax revenue estimated at about 15 billion. If only one third of lost tax revenues is collected, then the State will receive 5 billion euros annually, which is roughly the total amount of the single property tax (ENFIA).

The “underground economy” is guesstimated at €40 billion, and that’s a tax loss of €15 billion? That means a 37.5% tax rate on the entire economy! No wonder Greeks like to use cash: they are losing €37.50 out of every €100 they spend to the tax collector. In the end, taxes, while necessary to pay for essential services, are still a drag on the economy: they burden every private transaction with unrelated expenses. It’s no wonder that the Greek economy is in the toilet; I just don’t want to see that here.
Cross-posted on The First Street Journal.
¹ – Not actual dollar amounts, but simply the number of transactions.
² – I was unable to find average transaction costs for Greek banks, but they don’t do these things for free. I am more concerned with such proposals being put in place in the United States.