When you pay cash at a small retailer (or restaurant), sometimes the money goes straight from your wallet into the owner’s wallet. The income is never declared, and of course the GST goes missing.

In fact, the GST is the icing on the cake. Imagine you sell something and not only pocket the cash but you are also pocketing the GST portion owed to the government. Of course, there are checks and balances but as long as the retailer is not greedy and as long as they are consistent, this can continue for years.

One of the problems faced by the retailer is how to spend the black money. Shopping at the supermarket or filling up with petrol helps but there is only so much cash that you can spend.

In some retail circles, there is a pool of black money that circulates. One of these is the jewellery industry. Jewellers need to buy merchandise – say diamonds. They have too much cash lying around so they pay the diamond merchant in hundred dollar bills. The diamond merchant reluctantly must accept this – reluctantly because he too is sitting on a stash of cash he can’t get rid of quickly enough.

If you are sceptical, I can advise that I have personally witnessed a retail jeweller at closing time stuffing huge wads of notes into his pocket – with some difficulty.

American economist, Arthur Laffer, drew the curve below depicting the level of taxation on the horizontal axis and the amount of revenue the government takes on the vertical axis.

On the left edge of the graph, the tax rate is zero per cent and the government gets no revenue from tax. On the right edge, the tax rate is 100 per cent and again the government revenue is zero. Why? Because why work if every cent you earn goes to the government?

So, every government in the world has to decide how much tax to take off us and this is usually somewhere in the middle of the curve. Take too much and it can backfire with revenue decreasing. Take too little and there isn’t enough revenue.

We all like to pay as little tax as possible, but as a small retailer, if you are not only paying no tax but also no GST on some items, not only is it illegal, but you are stealing from the government, plus you are stealing from the rest of us. If the government hasn’t enough revenue, they need to raise the rate and as we have seen above, this provides a disincentive for growth.

So think twice before you pocket that cash. And for those in government, rather than faffing around trying to lower the LVIT, how about putting that time and effort into reducing this kind of tax evasion?

Stuart Bennie is a retail consultant at Impact Retailing www.impactretailing.com.au and can be contacted at [email protected] or 0414 631 702