Today's Wall Street Journal reports that the IRS estimates unpaid taxes at roughly $290 billion. That's nearly enough to close the budget deficit on its own if it were collected, without any changes in government policy. Whatever your views on taxation, it is grossly unjust for some people to break the law and let the tab fall more heavily on their fellow citizens. Yet our present system of taxation relies heavily on self-reporting; tax fraud can be discovered in individual cases, but it seems impossible to halt entirely.
Meanwhile, we are moving more and more in the direction of two loosely-connected economies: a cash economy and a cashless economy which runs on electronic transactions. The cash economy is largely the province of lawbreakers of one sort or another, whether it be those who want to avoid what they consider excessive taxation of otherwise-legal activities, or those who actually make and spend their money illegally. The cashless economy as it presently functions can be incredibly convenient for users but often has unreasonable transaction costs, especially for businesses. (For example, here are the fees paid by the merchant for each Visa transaction.)
Additionally, the proliferation of payment schemes can make recordkeeping and budgeting far too complicated. This is compounded by the sloppiness with which most people manage their money in any event. We as a society depend too much on high-interest credit for our own good, and people far too easily waste their money on frivolous expenses. A daily visit to Starbucks (assuming $3 a day) will set you back $1000 per year. That same money in an investment account could secure your eventual retirement.
Even with the growth in electronic funds transfers, cash has refused to die. This is primarily because individuals have had no convenient way to accept electronic payments. It is hard to match the ease of digging into your pocket for a few bucks. Yet this competitive advantage is beginning to disappear. Paypal, for example, allows low-volume transactions for free. Admittedly the process is still relatively clunky, but that is merely a matter of improving the interface. I could easily imagine someone writing a macro for a cheap handheld internet device that could make Paypal transfers as quick as credit-card transactions are today.
Governments have a large interest in eliminating cash altogether. If all transactions were electronic, they could be routed through a central government clearinghouse, giving a government realtime data on all transactions using that currency. Aside from the obvious uses for taxation, a record of transactions could also be used to generate economic data, detect and prosecute monetary crimes, or (more ominously) to exert control over citizens by regulating how they can make and spend their money. (Such a scenario is a favorite bugbear of gold-afficionados and black-helicoper types. That does not make it any less plausible.)
Some may argue that governments have no right to control people's money in this way, saying that it represents a dangerous infraction on property rights. Perhaps; on the other hand, money is issued by governments to serve as a symbol for value. It is a crime to deface Federal Reserve Notes; in a real sense, governments never give up ownership of their currencies. Citizens are permitted to use government property as a medium for exchange. A parallel can be drawn with public roads and the like.
It is doubtful that electronic currencies and a centralized clearinghouse would be any greater an infringement of property rights and privacy than our current system. Governments can freeze bank accounts or confiscate cash; governments can demand financial records from banks or investment professionals. The only difference is one of efficiency. In a centralized system, there can be no hope of escaping government scrutiny. But that can work to our benefit, if property crimes and tax evasion are curtailed, and if transaction costs for electronic currencies went down. Additionally, proper recordkeeping would become trivially easy. A large segment of the parasite economy (not in a derogatory sense, just in the sense that tax preparers et cetera add little value to the larger economy) would become obsolete.
In all likelihood, a parallel economy based on barter and private currencies would arise. There are some small moves towards such a system already. But criminals who use such things (as opposed to private citizens worried about government control) would lose their easy interface to the legitimate economy, once anonymous cash is replaced. It becomes more difficult to benefit from your crimes safely.
The question now becomes whether such a system is cost-effective, and how governments who use such a system can be prevented from turning it into a tool for oppression. But if sourced transactions allow us to nearly close the deficit, we should at least take a closer look. (Whether politicians can resist spending beyond their means regardless is another problem.)