Economic Policy Review ISSN 1313 - 0544

Cash Payments as Illegal Transactions

Author: Petar Ganev and Mihail Andreev / 06.04.2011
Rate This Article:

The introduction of the Cash Restriction Act is a subject of great public interest, due to the fact that its basic idea is quite easy to understand and debate, and also because it is viewed as just another way for the government to intervene in purely private business – payments in an economy. In fact, the bill itself is only 3 pages in length, consists of 5 articles, and the motives attached to it will barely fill one page.

The legislator propose that all payments on the territory of Bulgaria exceeding BGN 5000 to be made by bank transfer – in other words, no cash payments exceeding BGN 5000.

There is more however – the transitional and final provisions record an amendment to the Labor Code, in article 270 (referring to the location and timing of payment of wages) by adding a new paragraph. It states that in cases where employees work in places where financial services are provided (populated areas of the country) their paychecks should be transferred to a bank account of their choice. This means no cash payments for wages.  Taking into account the bank sector diffusion and since most businesses operate in populated areas (not on barren rocks, for example) it seems that most of the employers and employees will be affected. What is more, the 5000 BGN rule is not applied when payroll is considered, i.e. the size of the compensation (even if someone is paid the minimum wage) is irrelevant and it could be only transferred through banks.

There are two major issues when considering the bill – a moral issue (third party interferes in private transactions), and purely pragmatic one – the successful implementation of this restriction.


Cash payments and the moral issue      

Cash payments are the typical way payments are conducted in Bulgaria – It serves best the interest of the parties directly involved. The reason that third party pursues interference is that those voluntary and mutually beneficial agreements happen without the supervision of the government and – as  the motives of the legislator explain – the government suspects the existence of a “persistent cash flow that remains outside the accounting system”. In other words, cash payments are in their essence “invisible” for the government, so they generally lead to lower tax revenues. The same concept applies for paying wages in cash – lower income taxes and social security are paid to the government so the system is in a way “cheated”.

However, fighting the informal economy has its limits. Government’s desire to regulate and oversee transfer of funds and tax payments cannot be achieved at the expense of the rights of the parties directly involved in such a transaction. Payments can be settled in various ways, but it is not up to the government to decide which one is the right one. This applies to wages with even greater power. Bank services have evolved and could be immensely convenient, but there is a fundamental difference between “convenience” and “coercion”. Cash restriction is first inadequate interference in private business and then a fighting informal economy policy. Government cannot wage its war blindly and should respect people’s rights – the right to own your money and use it as you wish is beyond disputes. Using payment services is a matter of choice and it is not government business to turn it into an obligation.


Cash restriction and the pragmatic side of the problem

Ruling majority declares it fights informal economy and aims at driving cash flows into the formal economy. It is a noble goal, but the means to achieve it – inadequate. Shadow economy is informal, which means that imposing new rules will hardly scare the people involved in it. If someone makes unregistered payments in this current situation, he is breaking the law so the government should take action even now. The one breaking the law in the first place, would not mind breaking some more formal rules. Obviously, the legislature continues to blindly believe that "bad guys" can be caught by new texts that make them even meaner.

The BGN 5000 limit is also important but the question is in the principle. There are both honest and dishonest people who operate with money beyond this amount of money. This particular number eventually will be used to ease the public discussions – by increasing it later on. There is no explanation why this particular number was picked up and the range of transactions that will be affected by it. Fixing such boundary blindly and without an idea of ​​the scope is extremely weak point of the bill.

Law spreading over wage payments is even more inadequate. When employers pay their employees in cash, this transaction is done in private, so it will be done just the same even under new regulations. At the same time, this new law will affect those playing by the rules – the ones that declare and pay according to regulations. In other words, Cash Restriction Law will have controversial effect – more rules and regulations for loyal businesses and virtually no impact on the informal sector of the economy.

Furthermore, National Revenue Agency’s disturbing admission that no analysis were conducted to estimate the fiscal effect of this new law – they just stated that the bill will help the execution of the revenue part of the budget. The motives attached to the bill state the opposite: “imposing this regulation will cause significantly higher revenues…”. In other words, motives are as short as they are wishful.

Reality in Bulgaria leads us to conclude that this new law will simply not work, but will in effect bring government closer in our everyday business.


Additional text: What happened afterwards?

The law was passed by the Parliament. All of the compensation provisions were pulled out of the text – thus the cash wage payments are not restricted by the law. The 5000 rule was raised (as expected) to 15000 – thus cash payments above BGN 15,000 are now illegal.