The Dream Tax?

If most politicians and bureaucrats were asked to describe their perfect tax, it would have the following characteristics:

• Raise a lot of money;
• Be easy to assess and can be collected automatically;
• Be hidden in the price of goods;
• Appears to only tax the very wealthy;
• Be easily manipulated to favor the groups who contribute the most to the politicians but would not be easily seen by the public;
• Not require tax returns.

The present income tax is sold as punishing the “rich.” However, the income tax has the liability that people see how much their wages, not some rich person’s wages, are reduced and too many tax returns must be filed. It is also necessary to have it collected by the Internal Revenue Service– a very troubled institution that is universally disliked and feared.

Many politicians would like to increase the income tax rates but are concerned that this will create more upset voters, and the most important thing for a politician is to keep his or her job.

Some say that a good tax is the value added tax (“VAT”). This is a tax that is added at each step of the production of a good. The value added tax does meet many of the politician’s requirements listed above. It can raise a lot of money. It is included in the price of goods and will lead to increased prices but the price increases, like the increased gasoline prices, can be blamed on greedy companies.

Because it is added on at each step of the production cycle, it is possible to decrease the tax rates for favored producers and increase the tax rates for less favored producers, and this could be hidden from the public. Finally, the VAT would not require any individuals to file tax returns.

However, the fact that the VAT caused price increases related to consumer purchases would be easy for the meddlesome people using the internet to expose, and people would see that the increase in the costs of all their goods was really, to a large degree, attributable to the VAT. This would create upset from the public who were initially told that the increase was due to greedy manufacturers and retailers and there might even be an attempt to unseat the politicians.

No, what the politicians want is a tax that can meet all of the above characteristics and many of them believe that they have found the perfect tax. The tax is called the financial transaction tax (“FTT”). The FTT could be levied each time stocks and bonds were traded, on derivative contracts, on options, on puts, on forward contracts, on stock swaps, on each credit card or check payment or other money transfer.

Placing a small tax on financial transactions is not new. In 1694, Britain actually collected a tax on stock purchases. In the United States, much of the financing for the Securities and Exchange Commission (“SEC”) has come from “Section 31” fees. The SEC site explains, “When you sell a stock, you may have noticed that a small transaction fee, often just a few pennies, appears on your confirmation slip. Although some broker-dealers have described this charge as an ‘SEC Fee,’ the SEC does not actually impose this fee on individual investors. (https://www.sec.gov/answers/sec31.htm) Many other countries have seen the FTT as a way to obtain more funds for government or to fund specific purposes.

Some proponents of the FTT predict that by taxing the entire spectrum of financial transactions at a rate as low as ten basis points can bring in as much as $300 billion in tax revenues. (A basis point is one hundredth of one percent or equal to one cent of every $100.)

Proponents maintain that an FTT would eliminate much of the expenses of collecting revenue for the government because it would all be done automatically through the present electronic systems through which the financial transactions are processed. They say that a person with a $60,000 401(k) plan would see their return on investment reduced by approximately $60 per year.

Of course, what is ignored is the source of the $300 billion of tax revenue. Some of the bureaucrats seem to believe that these taxes come out of money that would have been spent on expensive yachts or mansions. The truth is that this tax, like all taxes, will be paid from higher prices to consumers, lower payments to labor or lower payments to capital. When possible, additional taxes are passed on to the consumer. If the prices cannot be raised enough, then either payments to labor or to capital must make up the difference. Often the additional tax costs are split between price increases, wage cuts, wage freezes or hiring freezes or lower returns to investors and business owners.

This means that consumers are going to pay these “hidden” taxes either in higher prices, lower wages for our neighbors or ourselves, or reduced company profits which will affect our investment accounts and the ability to expand and hire more workers.

On the other hand, one of the problems with the FTT is that some of the financial transactions can be completed in other non-tax locations. The result is that many economists argue that the actual tax revenue will be much less than predicted. This means that the FTT rate will need to be increased and this will mean that more of these transactions will either not happen with the present frequency or will be moved into non-tax areas.

Since it is important to keep the FTT tax revenue up, the natural thing will be to increase the FTT rate on transactions that can be controlled—like money transfers either through checks or credit card transactions or bank deposits. This results in, like most tax increases, the real burden falling more directly on each of us. But at least it is just a line item on our bank and credit card statements and for most of us is not a large number—not like withholding for income taxes and FICA taxes.

This will still be much less visible than the VAT or the income tax and the politicians and bureaucrats love this. After all, most of the politicians and bureaucrats believe strongly that they know better what is good for people because people cannot be trusted to make the right decisions on their own.

It is this paternalistic viewpoint that explains why so many of the politicians and bureaucrats oppose all tax cuts and particularly a tax like the retail sales tax. The retail sales tax is very visible and shows all consumers the real cost of government. It also gives people all of their earnings and allows people to decide, not politicians and bureaucrats, decide what is important and how to spend their money.

Many people want to repeal the Sixteenth Amendment. They believe that it will be great to eliminate the income tax. However, they should be aware that unless the public demands a tax like the FairTax®, a national retail sales tax, the taxes that replace the income tax will be hidden, will attempt to reward conduct that the lobbyists, politicians and bureaucrats believe is best and be subject to loopholes inserted by lobbyists working with politicians and bureaucrats.

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