Preliminary findings from the University of Georgia show that social welfare could decline when people can’t pay with $50 and $100 bills. The research, which appeared this summer in the Cato Journal, takes a preliminary step in estimating whether proposals to eliminate the two largest denominations of dollar bills are worthwhile.
Popular proposals for eliminating large bills say it could reduce tax evasion and undesirable trade in the underground economy, like drug trafficking.
“Getting rid of cash overall might have more costs than benefits, and the purpose of any policy should be to increase our well-being, not reduce it,” said William D. Lastrapes, an economics professor at UGA’s Terry College of Business.
Many people try to evade taxes by using cash because it’s less traceable than cards or checks, Lastrapes said. His research was also motivated by claims that most $100 bills, and even $50 bills, are used in the underground economy for many other illicit purposes.
Lastrapes said a policy to do away with large bills would have subtle costs and unintended consequences for people who follow the law. He used a macroeconomic model to analyze what would happen to the economy if the government eliminated cash for the purposes of reducing tax evasion.
His analysis found that suppressing big bills reduced tax evasion and increased government spending on valuable infrastructure and public goods, but because people paid more taxes, they worked and invested less, which caused total economic production in the model to fall.
“Simulating the model showed that, overall, this cost in lost output and consumption exceeded the benefits of less tax evasion, making people worse off from getting rid of cash,” he said.
The paper lays the groundwork for further examination, especially with the interest in cryptocurrencies, such as Bitcoin, as alternatives to currency. But the model’s main strength, he said, is that it showed the effects such proposals would have on social welfare could reliably be quantified.
“As economists, we try to be as precise as possible. Can we put some numbers to the costs and benefits? If so, then you can make better policy, and that’s what we’re trying to do,” he said.