Wednesday, December 22, 1999

A Transaction Tax

Op-Ed piece written in 1997, in my libertarian phase

"Better taxation" sounds like an oxymoron. But, without some way to generate revenue we could not secure the freedoms we enjoy. The best alternative would be voluntary contributions, which would involve no coercion. But, this would hardly be fair, since there would always be those who would enjoy the fruits of other's contributions without contributing themselves. So the best we can do, as several thousand years of history have shown, is to refine the tax system to be as fair and equitable as possible and to keep it from becoming too intrusive. We must also find mechanisms to keep taxation from becoming excessive, which could lead to avoidance, evasion, and further intrusion to collect them. To keep tax collection efficient, taxes must be simple and direct. Armies of accountants, lawyers, and tax collectors only drain revenue from the tax stream, resulting in the necessity to raise taxes even higher. With these factors in mind let us consider how the present tax system could be modified to accomplish these goals.
The constitution places few constraints on the tax system, other than providing for taxation and requiring that taxes be uniform among the states. The sixteenth amendment, enacted in 1909 gave the Congress the power to levy income taxes. Since then we have seen this behemoth grow to where the average person requires expert help to compute their taxes, and where a significant portion of the nations resources are required to interpret tax law and adjudicate tax cases. We have an internal revenue service which has powers of seizure which appear to be in conflict with the privacy provisions of the fourth amendment. And we have provisions in the tax law which cause individuals and businesses to adjust their investment and work decisions to avoid excessive taxation. In short, we have gone too far astray of the qualities of a good tax. In the words of Adam Smith a tax was bad that "required a large bureaucracy to administer, encouraged evasion, and that put people through odious examinations by tax gatherers". The income tax as we presently know it does all of these things.
In looking for ways to eliminate the evils of the income tax, especially if you take the libertarian view that taxation is legalized theft, we can take a clue from the notorious bank robber, Willie Sutton. When he was asked why he robbed banks he said, "Because that's where the money is!". Another clue reveals itself if we look to how the income tax was enacted. It could only have been enacted if rates were low, which indeed they were initially. Citizens will pay a small premium to ensure their freedoms any day. It's only when it becomes large that the problems set in. The third clue is found in the burgeoning growth of consumer credit cards. I would venture to say that a large number of consumers don't know that every time they use a credit card the merchant who takes it pays 2 to 5 percent of the purchase to the bank issuing the card and the card clearing services who process the transaction. This, of course, is factored into the price of the purchase, and for all practical purposes is ignored by the buyer.
Well, where is all this leading? Apparently, what we need is a very large number to take a very small percentage of, such that taxpayers will not be led to avoid taxes because they are a large percentage of their income. Using the Willie Sutton and credit card clues and the Statistical Abstract of the United States, Table 822, we soon find that about the largest number in that fat book is one giving the debits (charges) to all the bank demand deposit accounts in the United States. The number is now approaching 300 trillion dollars! The total expenditures of governments at all levels; federal, state and local, is about 3 trillion. So for a 1% charge on all the checks written and cash disbursed, less than half of the minimum charged by credit card companies, would allow us to get rid of all other forms of taxation. Amazing, huh?
Now what about collection? Easy. The banks collect it and send it right to the treasury. With their monster computers this would be less work than the reporting they do now for interest income. No income tax forms, no sales tax to compute, no heavy duty tax lawyers and accountants.
But is it fair. How could it be less fair than what it is replacing, and at 1% who is going to feel they are being abused?
You might wonder, how can such a large amount of money can be generated by such a small tax rate, that is, how can the bank debit number be so large? To get a clue, examine the deposit turnover ratio of bank debits to assets. The average is 818. To get a better picture of what's happening, consider your own situation. Suppose you deposit $50,000 a year in your bank account, and your average balance is only $100. Then the turnover ratio is would be 500. For the average to be 818 means that there is a lot of money going in and out with relatively small balances on account. This ratio has increased from 203 in 1980 to 818 in 1991. There must be a lot more money churning now than then. To see where this might be coming from we look at the ratio for major New York City banks. It's a whopping 4375. Why so much higher than the average? Well, that's where all the financial markets are. All the money going in and out every day on Wall Street maybe? On the surface it appears that this tax would hit individuals, particularly individuals living from paycheck to paycheck, very lightly. For example, on your $50,000 a year deposited and spent, you would pay only $500, much less than what you are paying now in income tax. Even considering that the company paying your paychecks in paying another $500, the total is still much less than you pay now. So the rest of the bucks must be coming from those people and businesses who are churning money in investment accounts, that is, taking advantage of opportunities above and beyond those used by the average wage earner. In this way taxes would be assessed more heavily on those manipulating the most money. Is this fair? Maybe so, maybe not, but at 1% it's about the same as the brokers fee to execute a trade. Big deal!
Obviously, more massaging of the numbers needs to be done to see if this is a viable way of removing some of the burdens of the present tax system. But, it should give the accountants and economists something to do besides figuring our income taxes and the performance of the economy. Anyway, it appears worth a look by the experts.