# Why is bartering uncommon in modern countries?

Recently, I witnessed two acquaintances of mine engaging in bartering, where one traded his services for the services of the other. Both services had about the same value. By trading them directly, they didn't pay VAT or tax on income, as no money or even goods were involved here. That wasn't the reason for the barter, but it's an interesting aspect.

I'm not pushing this behaviour, but it makes me wonder why there's not more people doing this, as it is an easy way to save money by leaving out money and thus taxes. AFAIK, this is legal, or at least a 'grey area'. I suppose in most countries some law exists to prevent this happening on a large scale, but it would be impossible to enforce it everywhere or on a small scale. Especially since goods can still be valued in terms of money, but it is much harder to do so with services. And their presence and traceability is volatile, unlike with goods.

I live in a rather small village where locals often (have to) make use of each others service, often requiring the service more than once. Taxes and VAT are high here in the Netherlands, so it would make a significant difference. I'd expect them to barter the service to save money, but they just pay by the bill. I did witness two people bartering once, but never before. I haven't heard it to be common in other modern countries either. Why is it not more common?

• This question is linked to this, but the topic is still different. – Bart Feb 8 '18 at 9:20
• There are no savings because you would be fined for unregistered economic activity and charged tax at will (the officers will estimate the value of your services that will constitute a basis for income). It's typical for EU countries to count anything you become for free as income (a company car for example), and income tax is significantly higher than VAT. – 9ilsdx 9rvj 0lo Feb 9 '18 at 12:00
• Also a related question, "why don't we just skip taxes by..." law.stackexchange.com/questions/25846/… – AJFaraday Feb 9 '18 at 14:29
• @9ilsdx9rvj0lo That's not what the question is about. Of course a law can be against it, but it's hard or even impossible to enforce it. So it can be expected that citizens use that opportunity to evade taxes without consequences, but they (mostly) don't. – Bart Feb 9 '18 at 17:10
• I get the feeling this is urbanized vs rural, and I assume individual to individual (corporate bartering is detectable). Urbanized people can specialize in services that individuals don't really need (I'm a database programmer, no individual really has need of my services and barter just doesn't make sense). That being said, my extended family lives in a rural environment and earlier in January one of my Uncles exchanged smoked moose meat for ferrier services (horse shoeing) and hay...in the small village world barter works far better. – Twelfth Feb 9 '18 at 19:54

The main likely reasons why barter is not more common are:

1. The inconvenience of having to find another party who both offers what you want and wants what you offer.
2. Even if such a party can be found, the possible complexity of negotiating a "fair" transaction (eg I'll do your electrical job if you'll clean my windows monthly for the next 3 months).
3. I don't want to encourage it, but for those seeking to evade tax, the comparative ease in many circumstances of doing so via a normal monetary transaction, but with payment in cash.

A further point is that most countries with VAT have a significant "VAT threshold", that is, a minimum value of annual sales at which businesses are required to register for VAT and charge VAT (where applicable) on their sales. In the UK, for example, the threshold is currently £85,000. So an individual could provide services not exceeding that amount in any year and would not have to charge VAT. If two such individuals were to enter into a barter arrangement, there would be no VAT saving. The Netherlands is atypical in that its VAT threshold is unusually low: 1,345 Euros (see here, table on p 2).

• That explains a little bit, but tax on income/profit still fully applies. And I guess most people offering their service for a living easily revenue 85K. So every additional service after that means saving on VAT. – Bart Feb 8 '18 at 11:02
• @Bart Good points. I've edited my answer to make it more comprehensive. – Adam Bailey Feb 8 '18 at 12:07
• It's gotten a lot better! I think especially the 3rd point explains a lot. I wouldn't have thought it's easier to use cash, since it's easily traceable these days. Only when you completely keep it of your bank account you'd evade traceability for some part. – Bart Feb 8 '18 at 14:11
• I think an interesting part of the "fair value" argument is that, in the past, communities were small. Everyone knew each other and there were highly-fluid non-monetary interactions which kept the community moving forward, even when the plumber is down on their luck. As the community gets larger, that sort of informal handling falls away in exchange for formal handling like currencies. If you have to interact with the outside world (i.e. rest of the nation), then you get used to these informal things simply not occuring. – Cort Ammon Feb 9 '18 at 3:08
• @CortAmmon Agreed, which is why i'd expect it to happen sooner in a village than in cities. Especially rural areas in the US sometimes don't have a city nearby, so it'd be somewhat like communites from the past in the terms of dependability. – Bart Feb 9 '18 at 17:23

In the countries that I am familiar with (such as Canada), using barter to avoid taxes is definitely illegal. You are required to report the dollar value of the exchange as revenue. It is treated as an implicit trade of cash along with the trade of goods. Since I am not going to give tax advice to random strangers on the internet, please consult the tax laws of your jurisdiction.

There are exemptions, such as for little kids trading cards on the playground. The idea is that you cannot be earning a livelihood.

The authorities can detect this activity the same ways that they can detect people working for cash. It’s not easy, but it can be done. They can have undercover agents, get tips from whistleblowers (e.g., a bitter divorce), or just show that a person is living a lifestyle that is not in line with their declared income. Advertising that you accept barter is a pretty good method to ensure that you will eventually get a visit from an undercover inspector, or just a tax official who sees your advertisement.

Since tax evasion this way has to be hidden, an outsider cannot tell if it is going on. So it is obviously hard to judge its extent, other than by looking at successfully prosecuted cases.

Since businesses need to pay taxes (and most expenses) with money, barter does not help them meet those obligations. However, it has its uses. For example, a new firm will likely not be profitable for some time, so it will have no tax payments due. It might use barter transactions to preserve cash. Established suppliers might agree, as they want a new potential customer to succeed.

But since retail firms have to pay value-added taxes (sales taxes) with money, they have no incentive to offer customers the ability to barter. Furthermore, those customers could be tax inspectors.

A value-added-tax (VAT) also does a good job of providing a disencentive for such activity. An intermediary firm can get a refund on the VAT it paid for inputs by matching the inputs to the VAT paid on outputs. (That is why it is called a value-added tax.) Your ability to match the taxes is eliminated by tax evasion. And inspectors can tell whether retail firms (the usual end of the value-added chain) are charging households VAT. (In Quebec, the authorities made restaurants install new cash register systems that made it extremely difficult to run two sets of books, which was a common practice.)

• For a firm, all cash outlays (other than dividends) will eventually be expensed against income tax. Barter is not really advantageous. It has legitimate business purposes, and there was a niche industry in building barter internet hubs. However, there will still be a paper trail.
• When dealing with individuals, there is the “double coincidence of wants” problem. If a plumber comes to my house to fix a leaky valve, what exactly can I offer in return? If he wants to avoid tax, he will normally just ask for cash. Barter certainly happens among individuals, but it requires that they have a reciprocal need for the other’s services.
• Good points. So in some or more countries it is not a grey area, but plain illegal. But that still does not answer the question, as enforcement of that law is hardly possible, not cost effective, and also hard to keep uncontestable. Especially if it doesn't happen on full scale. You can't prove that someone did a service in exchange for another one, or purely to help, and it is hard to value the service in question. In practice, hardly anyone bartering for less than 10k per year would get prosecuted. So I'd expect people to (ab)use this opportunity more. – Bart Feb 8 '18 at 13:56
• How do you know they aren’t? The only way it is detected is by being busted, like any other illegal activity. But as I note, advertsing that you do barter transactions would get you busted, an agent would just transact with you, and wait to see whether you report it - very easy to do. You could only do transactions with people you trust. So it has to be invisible, by definition. In Canada, with the VAT, barter transactions are inefficient - you cannot charge back VAT on inputs if you have no corresponding VAT receipts on outputs. – Brian Romanchuk Feb 8 '18 at 14:09
• That's quite interesting. What happens if all your living is made through bartering? Will the Canadian Revenue Agency accept my 100 hours of reiki healing in lieu of hard loonies? – Jamie Bull Feb 8 '18 at 21:32
• No, they will not. You need to get your hands on Canadian dollars to discharge the tax obligation. (This is one of core theoretical points of Chartalism.) Admittedly, if all your transactions are barter, and of the odd job variety, your imputed income might drop below the level where you have to pay taxes. You do not have to pay GST on incomes below \$30,000, and the cut-off for income taxes is around \$10,000. – Brian Romanchuk Feb 8 '18 at 22:32

The same reason why money became popular in the first place: bartering doesn't scale well. Even if you're able to evade taxes by bartering, the inconvenience makes it difficult to take advantage of this on a large scale. It's only really feasible for casual transactions among family and acquaintenances, not real businesses. When you do barter with these people, you don't usually worry about the precise values of what you're trading, it's very informal; for instance, you might pick up the check when you go out to dinner with friends one night, and next time they do, but no one checks that the prices were the same. Businesses can't really operate in such informal ways.

The benefits that money provides are that it's fungible and has an unlimited shelf life (outside hyper-inflation -- I think it's likely that bartering is resurrected in such conditions). You can buy anything with money, you don't have to have a product/service that the seller wants in return.

It doesn't save money.

Keep in mind that revenue taxes are calculated after deduction of expenses. So if I sell something for 50€, and buy something for 50€, the total earnings of my company have not changed, so neither have my taxes.

At the same time, the rules for what a company can claim as business expenses might be wildly different between them, but normally that is also in the favor of accounting properly.

For example, when a catering company provides food to an advertising studio, and the studio provides advertising materials, it makes sense to invoice each other because the other's services are deductible, while the advertising company would have a hard time explaining why they are buying food.

So between companies, there is usually no point in barter.

• This answer does not seem to address the concerns about VAT. – Giskard Feb 9 '18 at 15:51
• @denesp, from my (German) perspective, VAT is also neutral as I can deduct the VAT from all my business expenses from my own VAT payment. I'm not sure about the situation in the US, but would expect a similar mechanism. – Simon Richter Feb 9 '18 at 16:58