Why is bartering uncommon in modern countries?

Question

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?

Answer 1

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).

Answer 2

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.

Canada Revenue Agency guidance on barter: link to CRA page

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.)

Some added points on incentives.

• 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.

Answer 3

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.

Answer 4

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.