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Posted on 10/19/2009 7:29:20 AM PDT by SeekAndFind
Have you been tracking Congress's frantic search for the hundreds of billions of dollars in new tax revenues it needs to fund its spending orgy? The latest Willie-Sutton trial balloon is a tax on Wall Street transactions. This is being met by howls of protest, as is customary whenever Congress fingers a new source of wealth it would like to spread around. As tax proposals fly, enticing targeted groups to hike their campaign giving in hopes of shifting the burden elsewhere, might it make sense to examine the moral basis of these proposals?
Oddly enough, there is a form of National Transaction Tax that ought to pass the most inclusive standards for the levying of a just tax. If broadly applied, such a tax could potentially eliminate the need for both corporate and personal income taxes. It is inherently progressive in that the heaviest burden would be carried by the rich - who would incidentally receive valuable benefits in direct proportion to their payments - with an almost negligible burden falling on the poor. And best of all, it would be voluntary.
A voluntary tax that could fund the entire federal government? Surely you jest.
The idea, first proposed by a certain novelist-philosopher forty years ago, is based on the simple concept that citizens who expect the government to guarantee the sanctity of their contracts should be asked to pay for this valuable service. The more you utilize the service, and the larger the value of the contracts you want protected, the more you pay. Asking a fry cook at McDonald's to underwrite the enforcement of a Goldman Sachs derivative contract is both morally offensive and economically inefficient. Suppose, instead, that everyone just paid their own way?
Contract disputes could always be handled by private arbitration, and nothing in this proposal limits that. But a fundamental tenet of civil society is that only the government has a right to dispatch men with guns to enforce a judgment. Want the right to use the court system and police to enforce your contract? Then be prepared to foot the bill with the equivalent of a contract insurance premium, paid in advance. Don't pay the fee and you don't get the service.
A true National Transaction Tax would be levied on any and all private transactions in which either party wanted the right to avail themselves of the public rule of law. Caveat emptor deals and cash-and-carry transactions would be spared the tax, again at the choice of the parties engaged. It wouldn't even require mutual agreement; the party that wants the protection pays the tax. But any other transactions with an expressed or implied contract, from buying and selling securities to taking out a mortgage to placing a purchase order for parts to writing a check to using a credit card would be subject to the tax. Proof of payment would be a precondition to achieving the standing required to sue in public courts.
The precise tax rate required to fund all the legitimate functions of government is left as an exercise for the reader. This would certainly vary based on what assumptions you made on the spending side of the ledger - after all, there is still no free lunch. But it would be hard to find a more economically efficient tax, or one with fewer propensities to cause market distortions. Sure, some Wall Street sharpies would invent some complex securities designed to avoid the tax. But if they did, they would have to peddle them knowing that if their Rube Goldberg machine blew up, aggrieved counterparties couldn't come running to Uncle Sam to sort things out. Meanwhile, I bet the rest of us would happily fork over 5%, or whatever the number turned out to be, without even thinking about it. And if Congress set the rate too high, maybe those private market alternatives might start looking attractive.
Because a National Transaction Tax could be applied at every stage in a supply chain, it would bear some resemblance to the dreaded Value Added Tax. Again, I haven't run any numbers but I'd be surprised if it took more than a single digit tax rate to cover the cost of eliminating the corporate income tax. Outsource a piece of your supply chain rather than handle a task in house and you pay the tax if you want the right to seek government redress should problems arise. After all, imposing the cost of private contract enforcement on the public is a classic economic externality. Mom and pop businesses that buy from trusted local suppliers can chose to go bare and forgo the tax, passing the savings on to their customers. Ditto any handshake deal like buying a used car from a friend. But as the expression goes, "don't come crying to me" if the thing breaks down as soon as you drive it down the driveway.
Tearing up the income tax code and enacting a National Transaction Tax, which could probably be codified in ten pages or less, might be politically impractical as it would limit the ability of Congressmen to reward their friends and punish their enemies the way they do with our present tax code. But wouldn't a broad based, voluntary levy thinly applied across the entire economy tied directly to valuable services be morally satisfying? Or would you rather keep playing the tired old game of "Don't tax you, don't tax me. Tax that man behind the tree?"
-- Bill Frezza is a partner at Adams Capital Management, an early-stage venture capital firm. He can be reached at bill@vereverus.com. If you would like to subscribe to his weekly column, drop a note to publisher@vereverus.com.
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Sounds like a fair trade, but who would expect the Govt to ever give up a tax...
Actually, no. A transaction tax of sufficient size to replace our current tax system would put enormous pressures on companies to integrate vertically as much as possible. A car company which owned everything from the iron mines and oil wells for steel and plastic, to electronics companies, to the assembly lines to the dealerships to employee housing and even the company stores for providing food to employees (and the farms for that food) would have a huge advantage to a car company which specialized in building cars so it bought steel from a steel company, molded plastic parts from another manufacturer, etc. Everything within a company would be outside of the transaction tax, so there would be a huge incentive for companies to grow.
Also, many of the transactions most of these people want to tax are financial money shuffling to take advantage of tenth of a percent advantages, so they will either go away if hit with a tax or (more likely) just move off shore so the only transaction is the initial money transfer. After that, buying and selling pork belly contracts can work just as well in London as Chicago.
Any transaction tax based on static analysis will ignore those two tendencies and the rate will have to be jacked up when suddenly 90% of the transactions they counted on taxing are removed from the tax base.
NY takes the cake...Over 90 new or increased tax items this year.
Sorry about the double post.
Yea, can't wait to see those IRS folks at the unemployment office...
Riiiight.
Sounds like the “Fair Tax” frauds are trying to reinvent themselves.
Here is a gimmee for editorial cartoonists. Obama as Al Capone, with his henchmen, all wearing cheap suits and fedoras, with some of his lieutenants carrying Tommy guns:
Obama - Al Capone
Joe Biden - Paul “The Waiter” Ricca
Rahm Emanuel - Meyer Lansky
Atty General Eric Holder - Frank Nitti
Timothy Geithner - Jake “Greasy Thumb” Guzik
Ben Bernanke - Tony “Joe Batters” Accardo
Murray “The Camel” Humphreys
Hillary Clinton, Janet Napolitano, and
Kathleen Sebelius - Various “Gun Molls”
Various Czars - Various Lieutenants
5% tax to cash my paycheck? Then 5% more if I want to buy something with it, or many times more than that built into the price of a domestically produced item because very rarely is something produced from company mined raw materials all the way through final shipping to the retail customer... there are middlemen and suppliers who all get hit for an extra 5% on top at each level. Since foreign production would only take one 5% hit at the time of import, you might as well kill our remaining domestic production of anything.
I think I would skip direct deposit and either take payment in a stack of hundreds every week or take payment in kind if I worked at a company which made/sold something I could use or barter with.
Either the tax would kill the economy, or else a side "bonding" businesses would start who would escrow payments until completion of contracts and charge far less than 5%.
If I understand this properly, the idea is to add a fee to contract drafting that then provides the payor with the ability to have the government enforce the terms of the contract. If you don’t pay the fee, you lose the ability to take the other party to court to enforce judgment in a contract dispute. The problems I have with this are that it further abrogates contract law, in that contracts are now voluntary. If the other party in the contract doesn’t have deep pockets, you can violate the contract to your heart’s content without fear of legal reprisal. Also, if you do have deep pockets and the other guy doesn’t, you can draw up contracts that are biased in your favor, and use the system to force judgement on the little guy. Essentially, you can buy government muscle to put the squeeze on anyone who gets into a contract with you. Further, this opens up the possibility of bribes further than it already is, with corrupt agencies willing to take a little extra to swing any judgment your way.
Also, if this goes through, any contract with the government option automatically becomes more valuable than a non-backed contract, thus changing the market; as non-backed contracts become second-class, fewer people will use them, causing a shift in the way people agree, and likely causing a suppression of commerce at the lower end of the economic spectrum.
That is exactly what it is....
Loony.
Income is not the problem. It’s a giant red herring that is brought out any time government starts to run low on funds. Spending is the problem. When government, at EVERY level, is forced to live by the same rules the family is when it comes to income and outgo then, and only then, will the problem be on its way to a solution.
Of course, that's also expensive and tends to promote inefficiencies of management due to bottlenecks in information flow (usually wrongly discounted, IMHO). So I don't think it's as simple as that. It seems likely to me that vertically integrated entities will run afoul of already existing monopoly rules. Any small player may avail themselves of the anti-trust laws by paying the tax. Perhaps to avoid the costs of enforcement other tactics might be used that are already used to avoid legal expense. For example one solution already in use is arbitration agreements. Only the arbitration contract needs to be enforced, and the enforcement tax could easily be limited to the matter at hand. In fact, to avoid losing out to the competition the gov't might simply require posting a tax bond to seek enforcement of a contract in court.
I am not going to foolishly insist there will be no perversion of the object of business by this form of taxation. OTOH, the current system happily perverts business for social and political causes anyway.
I do take exception to the author using the term "right" to describe government power. Government has authority, not a right, to exercise power.
I’m in favor of a flat tax-rate.
Doesn't matter how sorry you are, if you were in Great Britian, you'd still have to pay the 15% VAT on the second post. :-)
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We already have this tax. It's called "legal fees." Instead of being collected by the government, it goes into the pockets of the Trial Lawyers. The Trial Lawyers in turn donate a large chunk of it to Democratic politicians, who protect the right of the Trial Lawyers to operate this scheme.