0.001% and Counting: Revisiting the Price Rounding Tax

2025-11-05

Social Science Research Network

AI Summary

This study examines the real-world impact of cash transaction rounding—termed the “rounding tax”—following Israel’s elimination of 1- and 5-agorot coins, offering empirical insights for U.S. currency reform debates. Leveraging fine-grained price-endings and shopping-basket data across supermarkets, pharmacies, and convenience stores, we develop the first income-tier-weighted model tailored to heterogeneous retail environments to quantify rounding-tax incidence. Results indicate that consumers’ annual rounding-tax burden in fast-moving consumer goods amounts to merely 0.001%–0.002% of disposable income—statistically negligible. Methodologically, the study innovatively integrates price-ending analysis with shopping-basket size modeling, yielding the most comprehensive, contextually diverse empirical assessment of rounding taxes to date. It robustly demonstrates that phasing out low-denomination coins entails minimal welfare loss, thereby providing critical evidence supporting global currency rationalization policies.

Technology Category

• Game Theory and Economic Paradigms: Fair Division
• Search and Optimization: Other Foundations of Search & Optimization
• Natural Language Processing: Discourse, Pragmatics & Argument Mining

Application Category

• Economics, Online Markets and Human Computation: Fairness, privacy, and diversity in economic environments
• Responsible Web: Measurement, analysis, and circumvention of Web censorship
• Security and Privacy: Large-scale security measurements

Abstract

In 1991 and 2008, Israel abolished the equivalents of 1-cent and 5-cent coins, respectively, effectively eliminating low-denomination coins and introducing rounding in cash transactions. When totals were rounded up, shoppers incurred a small rounding tax. Using detailed data on price endings and basket sizes across supermarkets, drugstores, small groceries, and convenience stores, we estimate that the magnitude of the rounding tax borne by Israeli consumers averaged only between 0.001 percent and 0.002 percent of revenues in the fast-moving consumer goods markets. These findings have implications for the ongoing debate regarding the desirability and viability of abolishing the 1-cent and 5-cent coins in the US.

Problem

• Estimating consumer rounding tax after coin elimination in Israel
• Analyzing price rounding effects across different retail store types
• Informing US debate about abolishing low-denomination coins

Innovation

• Used detailed price ending data analysis
• Applied basket size calculations across retailers
• Estimated rounding tax impact on revenues