Cyrus Vance, Jr. and Kathryn Wylde, respectively Manhattan District Attorney and president/CEO of the Partnership for New York City, complain about restaurants installing software in their point-of-sale systems to under-report sales, thereby reducing sales tax payments to New York State and City.*
Why do they do this?
[u]nscrupulous individuals have developed automated suppression software programs that can falsify sales activity, particularly cash transactions…
Is this behavior more prevalent than old-fashioned, low-technology cash skimming? Vance and Wylde don’t say, and neither does the grand jury report, though the latter says the matter came under review because of its “pervasiveness.”
Taxes and regulations never achieve 100% compliance. Regulated entities always face temptation to under-report income or evade regulation. They even may feel justified in doing so if they believe a tax is abusive or a regulation unfair or silly. Noncompliance can be reduced through aggressive enforcement, but the cost of enforcement must be deducted from tax proceeds or estimates of regulatory benefits to gain a correct picture of tax and regulatory effectiveness. In short, each tax and regulation has an optimal compliance rate.
The grand jury — a subsidiary of the office of district attorney Vance — recommends, among other things, that the sale or use of automated suppression software be made a felony, with no statutory minimum dollar violation. Presumably this would motivate some noncompliant restaurants to comply. Of course, some restaurants might decide to return to old-fashioned cash skimming technologies (which presumably are less cost-effective). And it would stimulate research and development into new technologies that are harder to detect.
The tax on restaurant meals in New York City is 8.875%. Cash skimming (regardless of the technology) would rise if the tax rate were increased. It would fall if the tax rate were reduced.
But taking Vance, Wylde and the grand jury report at face value, it means technology has reduced the economically optimal sales tax on restaurant meals. (It cannot be discerned from these references whether the optimal tax is greater or less than 8.875%. All that can be said for sure is that the optimal tax is lower now than it used to be.)
New York State and City can expend more resources enforcing their existing tax rates, as Vance, Wylde and the grand jury propose, but that inevitably will reduce the net revenue to the State and City. Alternatively, New York State or City could reduce cash skimming by lowering the tax rate(s), thereby attenuating the incentive to cheat.
Analysis is required to determine which option is better for New York City. The answer is not as simple and Vance and Wylde represent it to be.