Rachelle Holmes Perkins (George Washington) presents Venmo and the Persistence of Invisible Income at Pepperdine as part of its Tax Policy Workshop Series, hosted by Deanna Newton:

Digital payment platforms have made it easier than ever to track economic activity. However, despite the decades-long migration from cash to digital payments, the taxation of “invisible” income, particularly tip wages and peer-to-peer (P2P) transfers, continues to strain the tax administration. Recent federal law changes have intensified that strain. Congress created a deduction for “qualified tips.” At the same time, it reversed the planned expansion of required information reporting by third-party P2P payment platforms, such as Venmo and Cash App.

This Article argues that these two legislative changes demonstrate that the social norms of cash have proven stickier than cash itself.  Taxpayers continue to view P2P payments as private and informal, even on fully traceable platforms. Under this “false cash equivalence,” social meaning, not visibility alone, is a binding constraint on compliance in P2P transfers.

Using these statutory enactments as a case study, the Article develops a three-factor legitimacy model for tax administration based on: (1) detectability (can the IRS see the income), (2) administrability (can taxpayers and the IRS process the resulting information at a reasonable cost), and (3) social meaning (do taxpayers accept the intervention as consistent with their understanding of what the tax system is entitled to know and do). The central theoretical claim is that social meaning operates as a binding constraint for invisible income. The Article’s prescriptive contribution is a durable visibility proposal designed to satisfy all three factors simultaneously with respect to digital P2P transfers.