June 08, 2005

Transaction Tax

Here's an intriguing idea found via the comments to Kevin Drum's post on "If you could make one change to the tax system, what would it be?" The idea in question is the transaction tax, which would entirely replace all current federal taxes, and is being championed by Rep. Chaka Fattah (D-PA), which would be a very low—less than 1 percent—tax on every transaction involving a payment instrument: check, cash, credit card, anything else. Assuming for the sake of argument that the tax was .4 percent, then a person buying a $1,000 stereo would pay a $4 tax. A company buying $1 million worth of equipment would incur a $4,000 liability. And so on. You could even have a tiered system—bigger payments incur a bigger fee—depending on how you wanted to structure it. The exceptions would be payments amounting to less than $500, salaries and wages, and transactions involving individual savings instruments. Presumably you could also engineer other credits and deductions. (Or subsidize things like homeownership and the low-income salaries via direct government spending.)

The advantages here, as far as I can tell, are quite a few. For one, the economic burden would fall on as wide a base as possible, eliminating a lot of distortions caused by the current tax system. Foreign citizens and businessmen would be included too. It's also extremely difficult to dodge this tax, because even if you tried to shuffle money abroad, you'd still incur the tax. So presumably the government could raise a lot of revenue through curbing tax evasion. Plus, it could capture revenue from the underground economy. Now it would take some fiddling to make it progressive and keep certain tax incentives, but presumably that could be done. The main question, it seems, is whether or not it would distort certain forms of economic activity—short-term speculative trading, for instance—but again, presumably a big of jiggering could do the trick. (Actually, serious question: would a tax on speculative short-term trading be such a bad thing?)

Fun idea! And House Ways and Means Chairman Bill Thomas (R-CA) seems to like it, although to be honest, I can't imagine the current regime in Capitol Hill passing a bill that cracks down on tax evasion. Another consideration here: I honestly can't tell whether this is the sort of tax whose rates would be very easy to increase ("Hey, the rate's so tiny, what's another tenth of a percent?") or very difficult to increase (since any hike, even a progressive hike, would affect so many different interests, opposition could be more widespread). And presumbably there are other problems I'm not seeing...
-- Brad Plumer 10:17 PM || ||