If you talk to any crypto evangelist long enough, they eventually will mention the unbanked—it’s one of those terms that have been thrown around a lot in the last few years. It means what you think it means: an adult who doesn’t have a savings or checking account.
The Federal Deposit Insurance Company’s 2021 National Survey of Unbanked and Underbanked Households estimated that about 4.5% of US households ( roughly 5.9 million households) were either unbanked entirely or were underbanked. The latter term refers to households who may have a checking or savings account but regularly rely on alternative financial services such as pawn shops, payday lending, and non-bank check cashing—you know, predatory services.
To put that 5.9 million number in perspective, imagine everyone in Pennsylvania was immediately deprived regular access to banking services and shuttled off to either a cash economy or complete reliance on AFS. Then add everyone in New Mexico, and it gets you close.
Like offering ocean water to a dehydrated sailor, crypto might look a lot like what the banking underserved needs, but it will almost certainly make things worse. And in the face of deprivation, it seems imprudent to let minor issues like a complete lack of regulation and the wiping out of over $2 trillion in value from November 2021 to November 2022 get in the way.
Still, it’s easy to throw stones and then opine about some pie-in-the-sky policy idea that doesn’t exist in practice. If some far-flung land had back-solved into a way to help the unbanked through some mechanism that doesn’t put what assets they do have in mortal risk, then maybe we could explore that alternative rather than continuing our dalliance with speculative crypto.
The Best Tax System on Earth
Floating around in the North Atlantic, in a beautiful part of the world where puffins occupy roughly the same place in society as pigeons do everywhere else, lie the Faroe Islands. They’re famous for their salmon farms—and for having “the best tax system on Earth.”
The Faroe tax system (TAKS) shares a lot of similarities with Denmark, which is the Faroes’ principal trade partner and, as it happens, helped the autonomous territory develop their code. Simplicity is an overarching principle—so is shifting the burden of compliance and calculation to a centralized state and away from individual taxpayers.
The state, not individuals and employers, keep tabs on income streams and set withholding amounts to avoid overpayment; most individuals neither owe anything nor receive a refund at the end of the year. The latter bit is owed to their tax system not being used as an aid system. Benefits that flow to the residents are made by direct payment, rather than tax deductions and credits that require individuals to contend with the concept of a debit for a negative value being tantamount to a credit.
TAKS is automated, and to facilitate all of that automation and calculation, all employed Faroese folks must have a bank account tied to a P-number. The result is that almost every resident has a bank account, and income is taxed along national, local, and church tax lines where applicable. So-called A-Income, comprising wages or salaries, are already fully taxed when they arrive in an employee’s account. With no tax on real property, the bulk of this A-Income is completely through the tax regime when it’s transferred to the employee.
It should be noted, however, that self-employed Faroese are subject to a regime that may be somewhat more familiar to Americans—they are tasked with estimating their B-income and will receive monthly bills based on that figure. Consumption taxes still apply, as one might expect, and take the form of a value-added tax. Companies must pay VAT on all sales of goods and services four times per year.
Exporting Lessons From the Faroes
What can the Faroes, a collection of islands with a combined population of 52,000, tell us about crafting a solution for the bank-deprived? To answer that, we first must lay out in broad strokes why many folks are unbanked. The US Census Bureau last year found more or less what you would expect: For most folks, it comes down to money.
Banks have a minimum balance requirement for several reasons, such as meeting capital-to-debt ratios and making money-charging fees when said minimum balances aren’t maintained. Many banks will offer better interest rates and other perks when the account holder opts to have income deposited through direct deposit. Mandatory payment by employers to employees through a tax system that requires a bank account is the functional equivalent of everyone opting for direct deposit, and the capital-to-debt ratios are suddenly much more easily maintained.
Contrast this against a crypto-based solution to providing banking services. In that case, if the unbanked are going to be able to conduct transactions, they need internet access and some sort of electronic device. There is nothing inherent in the cryptocurrency regime that will lower that hurdle. One in five households in the US is not online, with about one-fifth of those offline households citing the reason as the high cost of home internet service. While the degree to which unbanked and offline households overlap hasn’t been established, one can assume there is some correlation between the two.
In American society, a bank account is a soft requirement of modern life. Nothing strictly requires you to have one, and you can get by without one. But you’ll be taking more financial risks, and it’ll cost you more in the long run to do so.
Making bank accounts a formal requirement seems like an added burden on those who can least weather it, but no less so than a cryptocurrency-based solution. Further, it comes with carrots and sticks for the banking industry to make banking less costly. And much like treating internet access as a utility, recognizing banking as a necessity to modern life will benefit consumers through integration with the tax system. Simplify the code, streamline the process, bank the unbanked, and do all of it without turning the unbanked population to the crypto wolves.
This is a regular column from tax and technology attorney Andrew Leahey, principal at Hunter Creek Consulting and a sales suppression expert. Look for Leahey’s column on Bloomberg Tax, and follow him on Mastodon at @firstname.lastname@example.org.