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Should we get rid of the penny?
Greg Mankiw says yes, and I am inclined to agree. When I lived in New Zealand, they didn't have Kiwi pennies and no one minded. My problem, however, is that I don't know what to do with sales tax (New Zealand had a General Services Tax [correction: Goods and Services Tax], akin to a VAT). In essence we would have to abolish sales tax on "small" items. That idea warms my libertarian heart, but what is then to stop suppliers from selling a car piece by piece, painted inch by painted inch? (But of course they wouldn't ring it up that slowly at the cash register.) Must we eliminate sales taxes altogether? Or can the law accurately specify what is the "natural unit" of a given commodity purchase? Inquiring minds wish to know...
Here are some relevant links on penny elimination. It is an interesting microeconomic (macroeconomic?) problem to figure out which prices get rounded up to the nearest nickel and which prices get rounded down. A related question is why businesses do not already round to the nearest nickel; of course some do.
Posted by Tyler Cowen on June 3, 2006 at 10:04 PM in Economics | Permalink
Comments
Just round down to the nearest nickel (or zero) on sales tax.
Posted by: Brock at Jun 3, 2006 10:24:19 PM
I think you were scooped on this by "West Wing" already :-)
Posted by: Matthew Cromer at Jun 3, 2006 11:09:01 PM
Frictional costs per transaction probably exceed the couple cents you're trying to save in
sales tax. The problem in principle already exists on a smaller scale, and I don't think
quintupling it is going to induce that much evasion of taxes.
Posted by: Dean at Jun 3, 2006 11:47:37 PM
The sales taxes need to be paid based on sales, not transactions. It would be up to the merchant to decide what price they should charge for small items. If the merchant doesn't charge the tax, then he or she will have to pay out of his or her own pocket (and could thus make up for it some other way).
For something so small, like candies, they could decide to sell them by the fives. Overall, this kind of merchant policy could lead to increased consumption of small items.
Posted by: Macneil at Jun 4, 2006 12:26:32 AM
We could simply have merchants INCLUDE tax in the final prices they charge. Problem solved.
Posted by: Half Sigma at Jun 4, 2006 12:45:18 AM
In Australia we used to have 1c and 2c pieces. The 1c had a possum on it, the 2c had a frill necked lizard on it. You could buy mixed lollies for 1c each, it was great. It was advantageous to meet your Dad at the front door when he came in from work as he was emptying his pockets, because pennies have always been a nuisance for grown ups, but back then, kids had a real use for them.
Now we don't have the copper coins, the register just rounds to the nearest 5c.
Now kids can't buy lollies one by one, they have to buy half a kilo at a time - so no problems with the gst as the small sales aren't happening. Of course the kids aren't small any more either, we are turning into a fat nation.
Posted by: Megan Hevron at Jun 4, 2006 12:48:38 AM
The real irony is that, had we kept the dollar as it originally existed, we'd have to introduce millies to deal with gentle and constant price deflation. The abolition of the penny is one more piece of evidence of how debased our money has become.
- Josh
Posted by: Wild Pegasus at Jun 4, 2006 1:26:20 AM
For the record, New Zealand's "GST" is (and still is, it's not something we once "had") the "Goods & Services Tax" and stands at 12.5% for pretty much everything -- rather than just "General Services", as the post has it.
Our neighbours to the West got themselves in all sorts of legalistic headache territory in trying to work out the politics of what was exempted and what wasn't. Basic foods? How non-basic can something be and still be exempt? Raw chicken? Cooked chicken? Cooked chicken, cooled? See, for example: http://en.wikipedia.org/wiki/Birthday_Cake_Interview
We spared ourselves that, at least.
Posted by: PJ at Jun 4, 2006 3:27:55 AM
However PJ, it does mean that in Australia we sometimes we feed our cats people food
instead of cat food because basic people food isn't taxed and our cats appreciate that.
Posted by: Ronald Brak at Jun 4, 2006 5:40:37 AM
"A related question is why businesses do not already round to the nearest nickel; of course some do."
Beats me, here in The Netherlands we already do it that way, when the penny got reintroduced with the Euro no one liked it. So payment with plastic still goes in cents, but with cash it's all rounded to the nearest nickel.
It wasn't government regulated too, consumerinterestgroups and businesses didn't like the thing so they solved it together.
Posted by: Marc at Jun 4, 2006 7:00:06 AM
My local Dunkin Donuts set prices so that after tax the payment is to the nearest nicket so his clerks do not have to bother with pennies. But he has a real cash machine with five registers and two clerks per register going very strong for four hours every morning. He get a nice boost to employee productivity that makes it worth it to him, but other retailers do not seem to have the incentive to follow his example.
Posted by: spencer at Jun 4, 2006 7:53:43 AM
When I was living in Japan the Consumption Tax was 3%, and many restaurants where I ate lunch rounded prices down to the next lowest multiple of 5 yen to avoid having to deal with the little aluminum 1 yen coins. So, for a lunch costing 950 yen, the price including tax should have been 978 or 979, but the restaurant made change from 975 (they wouldn't even accept the 1 yen coins I offered). Some other restaurants just quoted a price including tax that was a multiple of 5 and let the cash register compute the price before tax.
Posted by: Don K at Jun 4, 2006 10:52:10 AM
...josh is correct -- currency inflation/debasement is the core problem.
Today's American 'dime' {10 cents} only has the purchasing power of a year 1950 'penny' {1 cent}.
Year 2006 dime = Year 1950 penny.
Year 2006 penny = Year 1950 'tenth-penny'
Americans in 1950 had no need for a 'tenth-penny' coin ... and they don't need one now in 2006.
Abolish all penny coins !
Nickels & Dimes should go to.
Posted by: BaileyY at Jun 4, 2006 3:35:59 PM
How do you know "Americans in 1950 had no need for a 'tenth-penny' coin"? (For some unknown definition of "need".) The absence of a tenth-penny coin proves nothing except that the US Mint didn't make one. Maybe they had good reasons for doing that, maybe they had bad reasons for doing that. Maybe Americans in 1950 had a desperate need for tenth-penny coins. The omnipresence of "ten for a penny" candies suggests there was some "need" for a tenth-penny coin.
And, in fact, the original Mint Act of 1792 required that federal accounts be maintained -- in addition to dollars, "dismes", cents, and half-cents -- in "milles": one-tenth of a cent. I believe it is still used for tax calculation purposes.
Posted by: Justus at Jun 4, 2006 4:27:15 PM
How do you know "Americans in 1950 had no need for a 'tenth-penny' coin"?
Well, they certainly managed to get by OK without it.
I have to assume their need for a tenth-penny back then would be about as acute as our current need for a penny now. If I have such a need myself, I am unable to discern it.
Bumping up our existing range of currencies by a factor of ten is a fine idea. I can think of anything sells for less than a dime right now, certainly not anything that can't be reasonably bundled into a ten-cent package.
There have to be some real savings here. Minting pennies already costs more than face value, and fussing with them surely consumes significant amounts of time. I recall counting them at the end of every shift as I cleared out my register (do they still do that)?
Furthermore, we can put animals onto our new coins instead of a multicultural array of minor historical figures, thereby nipping that tedious controversy right in the bud. Eagles, bison, kingfishers, bunnies... what's not to like?
Posted by: Mike at Jun 4, 2006 7:40:29 PM
Speaking of eliminating coins, New Zealand is currently in the process of also removing the 5 cent coin. At the same time other coins (10c/20c/50c) are being reissued in smaller sizes. Previously ours were some of the largest in the world.
http://www.newcoins.govt.nz/
Posted by: James Newton-King at Jun 4, 2006 8:11:57 PM
While getting rid of the penny, we need to bring in larger denominated coins, $2,$5,and $10. A coin could then be used to buy something substantial, and coins would again be seen as useful, rather than as a nuisance.
Posted by: Jim Lebeau at Jun 4, 2006 8:52:55 PM
My guess is that cash will disapear and be replaced by debit cards long before we change our currency.
Posted by: Robert Schwartz at Jun 4, 2006 11:37:38 PM
"While getting rid of the penny, we need to bring in larger denominated coins"
It IS strange that a dollar now buys less than a quarter used to, but Americans still love their dollar bills. No one wants to use the dollar coins.
Posted by: Half Sigma at Jun 5, 2006 9:32:12 AM
"No one wants to use the dollar coins."
Maybe this is because American men don't want to chuck their wallets and buy new ones that have coin pouches. I was just in London for over a month and I didn't know what to do with all my coins. I ended up carrying it in a plastic sandwich bag because I didn't want to buy a new wallet.
I agree with Robert Schwartz; I think all physical currency will eventually dissappear. I'm looking forward to the cashless society.
Posted by: Peter Kim at Jun 5, 2006 10:12:01 AM
In Argentine in the years after the Austral was introduced in 1985, small change was sometimes scarce. It usually irritated me, more than it should have, when bus drivers or shopkeepers would hand me a few little candies as change. I don't think the penny is going anywhere in my lifetime because electronic cash registers enable ringing up transactions with an arbitary number of digits.
Posted by: John Mansfield at Jun 5, 2006 11:47:20 AM
"No one wants to use the dollar coins."
Paper dollars are better for tipping a certain type of entertainer!
Posted by: Anonymous at Jun 5, 2006 11:51:33 AM
After visiting Australia and Canada, I am very happy the U.S. barely uses the dollar coin and has no two-dollar coin. I prefer my money flat and not so heavy that it pulls my pants down!
On the other hand, I am fine with replacing paper bills with plastic ones to reduce the costs of additional production due to wear.
Posted by: Mr. Econotarian at Jun 5, 2006 4:25:06 PM
In NZ, GST is still payable on all goods despite lack of a 1-cent or 2 cent coin.
In NZ, a large number of payments are made by eftpos - so when I buy my groceries I swipe a card and enter a pin number authorising my bank to move the cost of the groceries from one of my accounts to the supermarket's (I can also pay for lots of things, such as taxis and library fines, the same way). This still happens down to individual cents.
When you pay by cash the shop adopts some rounding system.
GST is collected by the seller. Every so often (from memory, the frequency depends on the seller's turnover and ranges from once a year to monthly), the seller tallies up how many goods they've sold and the GST on that, and then tallies up how many goods they've brought and the GST on that, and pays IRD the difference (or gets a refund). Sellers with very small turnover are exempt from this process, so eg there's no need for people who ran a garage sale this year to pay GST. Consequently IRD never needs to collect GST in amounts of less than 5 cents. Payment to IRD is normally made by cheque or electronic transfer. If someone was determined to pay by cash, I presume they would round the GST owed up to the nearest 5 cents.
Lack of a 1-cent and 2-cent coin does not cause any problems with sales tax.
Posted by: Tracy W at Jun 5, 2006 6:05:03 PM
My friend proposed a probabilistic rounding scheme. Half the time it's up to the nearest nickel, half down. In the short run it would save everyone effort, and in the long run would raise the same amount of revenue.
Posted by: Jay at Jun 5, 2006 11:22:07 PM
