How to Reduce Your Cash Tax

By Karen Whaley

May 9, 2020

Yep, you read that title correctly. You pay a cash tax – likely every time you are at the store. Never heard of the cash tax? No worries. Today I’m going to tell you about the cash tax and the secrets to reduce your cash tax.

What is a Cash Tax?

Don’t feel bad if you’ve never heard of the cash tax. It’s a term I coined to explain the impact to your bottom-line due to the influence of credit and debit cards.

(Note: I am not talking about taxes paid in cash, which is a common cash tax definition.)

Reduce Your Cash Tax

These days a business that does not accept cards is unusual. Not only that, but not accepting cards can harm business’s sales. Me, you, and the vast majority of US consumers demand the convenience of paying with a card – not fully understanding the cost of such convenience.

Yes, it’s costing you money to use your credit and debit cards “everywhere where you want to be”. Plus, when you pay with cash, it’s costing you even more. Oh, the joys of convenience!

Let me explain.

Cash Tax – The uniform increase in price of goods or services where credit or debit cards are accepted.

First you need to know when merchants accept credit or debit cards, they pay processing fees to the credit card issuer, network, and payment processor.

These fees range (on average) from 1.5% to 3.5%. And that’s on average! The actual fee varies by merchant based on several factors and may be more than 3.5%.

In layman’s terms, this means the merchant has marked up the cost of your purchase by 1.5% to 3.5% to cover processing fees. Regardless of if you use cash or card, you are paying this marked-up cost!

I don’t know about you, but my savings account isn’t earning 3.5% interest right now. If I can reduce a 1.5% to 3.5% fixed up-charge on things I buy – sign me up!

You may be asking, “Is this really a tax?”

Yes. A tax is a compulsory financial charge imposed on any payer (you) to fund various public expenditures. Only instead of funding roads and emergency services, this tax is to fund a public system of financial convenience and protection – but only for certain, non-cash payers.

Which I why I refer to it as the “cash tax”.

Why Should I Care About the Cash Tax?

In case you missed it above, you are being charged an extra 3.5% (maybe more!) on every purchase you make where cards are accepted.

Every. Purchase. People.

Unless you’re a super saver – saving 50% or more of your income each year! – you are bleeding money at an upwards rate of 3.5% on the majority of your hard-earned money.

The Cost of Cash Tax

Let’s say you make the average US household income ($59,039 in 2017 per Wikipedia) and saving the recommended 20% of your income. Which means you are spending $47,231 per year.

You follow the cash is king mantra and pay for everything in cash. All purchases are at places where credit and debit cards are accepted. (Not realistic but play along with the simple math please.)

At a 3.5% rate, you are spending $1,653 in cash tax ($47,231 x 3.5%). If you can invest this $1,653 a year for 45 years at a 7% rate of return, you will have approximately $360,000!

Um, that’s a lotta moola in my book. And a huge price tag for a cash tax doing you no good as a cash user.

If you can invest even half of this amount ($826.50 a year) for the entirety of your average 45-year working career, under the same conditions, you will have approximately $180,000. Still a large enough number to want in your wallet!

How to Spot the Cash Tax

While more common than not, there are merchants who do not charge the cash tax. Simply because they do not accept card payments.

Typically, it’s very easy to spot cash tax-free places. Here’s an example where using cash won’t cost you more.

No plastic accepted means no cash tax imposed!

There are even certain situations where using cards costs you more because the processing fees are passed along to you directly.

Cash is king when spending here.

And let’s not forget online cash taxes.

Cash Tax = Convenience Fees
Calling cash tax what is really is – a convenience fee.

In these situations, cash is king!

Cash may also be king when negotiating large purchases like cars or houses. Or when shopping at local businesses who accept cards. However, the business kindly asks you to use cash when possible to put more of the profit in their pocket.

And cash will always be king if you carry existing credit card debt month-to-month at an outrageous interest rate.

How to Reduce Your Cash Tax

You may be wondering, “If everyone has to pay the same cash tax regardless, doesn’t it impact all of us the same?”


As a cash-only buyer, you lose out on the various credit card rewards structures. These reward programs will return some of your cash tax in the form of airline points, cashback, gift cards, and a whole host of other ways.

Plus, cash payers are simply paying more for the good or service because the merchant (store) doesn’t adjust the price and doesn’t have to pay the card processing fees for cash transactions. Basically, as a cash payer, you are helping pay for someone else’s card rewards!

The magic answer to reduce your cash tax:

Responsible use of a rewards credit card to pay for items where cards are accepted for payment.

I emphasize responsibly using a credit card. If you can’t be responsible, the cost of the interest rate on monthly credit card balances may be crippling to your financial well-being.

It’s true you won’t necessarily get to invest the difference as demonstrated above (unless you invest cashback rewards), yet you get more benefit overall than if you pay cash.

I like this NerdWallet credit card rewards selector to help figure out the rewards card just right for your spending satisfaction.

How to Use a Credit Card Responsibly

Most people would define responsible credit card use as simply paying off the balance in full every month. While I agree with this whole heartedly, I believe you must do more than pay the full monthly balance to be truly responsible.

Responsible credit card use also means not overspending – even if you can afford to pay the monthly bill in full. There is study-after-study showing people spend more when using plastic cards than cash.

Some might claim subconsciously overpaying is an indisputable reason to never use credit cards. However, that’s like blaming a shovel for digging a hole that’s too deep. Shovels don’t have any control over the depth of the hole they create any more than credit cards have any control over how much you spend. Period.

Credit cards also have many benefits. Including fraud protection and building good credit scores. Which translates to lower insurance premiums, lower loan interest rates, etc. and, once again, putting more money in your pocket!

If you don’t use a credit card simply because you overspend when using a card, you are only costing yourself money.

So how do you use a credit card responsibly?

  1. Repair your money relationship
  2. Track your spending
  3. Practice mindful spending

Repair Your Money Relationship

Repairing your money relationship will take months, if not years, of hard work and plenty of self-reflection. One thing you can do immediately is answer the following question with one word to start identifying your complex relationship with money.

“To me money means _____________.”

Keep this meaning in mind as you swipe your card. It just may shift when and how often you swipe.

Track Your Spending

Basic awareness of where you are spending money is the number one way to improve your financial well-being . If you only do one thing with your money, track your spending.

If you don’t already track your spending, use one of the many free tracking tools like or Personal Capital.

Practice Mindful Spending

Mindful spending is a touch easier to begin and make a habit of. A quick start tip is to ask yourself with every purchase,

“Does this purchase push me toward one of my goals?”

If the answer is no, take a deep breath and put the item back. For want purchases, walk away. If it’s a need purchase find ways to reduce the cost before buying.

Spend less on cash tax and be a little happier!

(And no, ice cream is not a need regardless of its general classification as food. Though I am guilty as charged for justifying ice cream purchases in just a way!)

In the end, reduce your cash tax with responsible rewards credit card use anywhere cards are accepted. This simple action will make your wallet happier and your spending life a little more satisfying!

Karen Whaley

About the author

Karen Whaley

Financial Lifestyle Coach
Certified Financial Instructor

I help clients use money to live - not live for money. If that sounds appealing, you are in the right place my friend!

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