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Home Publications Blogs Beat the Press Credit Swipe Fees: A Tax on Cash Customers

Credit Swipe Fees: A Tax on Cash Customers

Thursday, 10 March 2011 06:24

Michelle Singletary, the Post's generally adept personal finance reporter, missed one today. Regulations by the Fed limiting debit card swipe fees are definitely a positive step. Currently these fees are passed on to all consumers. The ones getting nailed worst are the cash customers who pay the higher price without even getting the convenience. This is like a sales tax.

The reduction in fees will not be passed on everywhere and always to consumers (firms do have market power), but to be an economist here, if firms thought they could mark up their prices by more, why aren't they doing it already? In other words, it is reasonable to assume that most of the savings will be passed on to consumers.

Comments (4)Add Comment
Marginal Cost of Swiping Always Higher than Other Marginal Cost
written by izzatzo, March 10, 2011 6:49
... if firms thought they could mark up their prices by more, why aren't they doing it already?

Exactly. The finance and retail merchant industry has modelled its business on the highly competitive cable internet model.

Cable programs, $199. Cable programs with broadband, $200. Broadband with no cable programs, $199. Therefore the marginal cost of adding broadband or cable to each other is only $1, while the marginal cost of each one alone is $199.

In comparison the price paid in cash or paid with debit card and no swipe fee is $199 and with swipe fee is $200, so the marginal cost of either when the other cost is already incurred by both types of customers is only one dollar.

This is another example of how the Obama Competition Recovery Plan is working to keep marginal cost and price down by breaking down monopoly barriers to entry into free markets with large sunk swiping costs.

Stupid liberals.
Cash is more expensive
written by Lord, March 10, 2011 11:44
but as it's costs are indirect, they escape attention. Card customers are subsidizing cash customers and if there are fewer of them, prices will go up, not down.
written by MB, March 10, 2011 12:51
If the swipe fee is comparable to a sales tax, then what would the value of those fees mean to the US budget if they were collected by the IRS rather than banks? Our country rejects the VAT but we accept swipe fees, which may well be a de facto national sales tax. Other countries established their VAT systems before swipe technology existed. They say VATs can be structured to be less regressive. Can the technology which enables point-of-sale swipe fees be adapted to be more effective, more fair, as a national sales tax?

Without looking to deeply into this, I realize I'm mixing up sales tax terms and that there are significant differences among them (http://en.wikipedia.org/wiki/Sales_tax). But I wanted to ask about comparing the fees now flowing to banks (who have behaved badly and harmed our economy) vs those fees being put to more productive uses as a tax revenue stream, like for example in support of early childhood education or health care or deficit reduction.

written by Bill H, March 11, 2011 12:26
"In other words, it is reasonable to assume that most of the savings will be passed on to consumers."

That is easily the most idiotic thing you have ever said here.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.