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The cash economy and tax reform paper

Published on 01 Jan 01 by Australian Tax Research Foundation

One of the arguments made for the introduction of a GST in Australia was its likely impact on the cash economy. This study by the Chris Bajada for the ATRF was the first review of the impact of the introduction of July 2000 Australian GST on the size of the cash economy.

The study shows that over the two decades before the introduction of the cash economy, it was onaverage about 15% of GDP in Australia. Following the introduction of the GST, the it declined to 12.9% of GDP by September 2000 - but it had crept back up to 13.6% of GDP by the following December. This trend is in common with the New Zealand and Canadian experience. The study conjectures that this initial decline may be partly explained by the government's very public assertion that the cash economy was going to be hit hard by tax reform - resulting in some cash economy participants ceasing trading (at least temporarily) until they better understood the new tax

The study found that a major cause was the participation by the household sector in the cash economy, contributing approximately 55% of the total activities taking place in the cash economy, rather than the business sector. Of all businesses participating in the cash economy, the services and construction industries appear to be the largest contributors. The study notes that reducing participation by household in the cash economy is the challenge for governments in the future.

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Christopher BAJADA


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