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Is A New Tax Needed for Taxing Times?

July 10, 2019

Our existing political systems evolved at a time of much more gradual social, economic and technological change and to restrain excessive government they were designed to be cumbersome.

Our existing political systems evolved at a time of much more gradual social, economic and technological change and to restrain excessive government they were designed to be cumbersome.  In addition, the myriad combinations, permutations and interactions of inputs into complex dynamic systems such as economies and societies are inherently unpredictable.  Unintended effects are the norm.  These often call for addressing but the causes and effects involved can also be difficult to clearly discern.  The result has been a growing burden of regulation that is outmoded, dysfunctional or has unintended consequences. This has become a major obstacle to almost any productive activity and especially to the initiation of new activity.

Addressing this morass is beyond the capacity of piecemeal reform.  A fundamental rethink of basic understandings and approaches is going to be required.  The interrelated matters of taxation, economic inequality and welfare are a critical example.

The taxation system has become a nightmare of complexity, cost, oppression, inefficiency, corruption, injustice, and sundry other unintended consequences.  It fosters a vast parasitic industry engendered by compliance and avoidance while severely distorting the efficiency of free markets.

A single transaction tax imposed on all withdrawals from accounts could replace the whole existing monstrosity with a vastly simpler fairer tax  that would require minimal effort to comply with, be far more difficult to evade and avoid the gross misdirection of resources now inflicted by capital flows driven by tax considerations.

The only requirement for such a transaction tax to be highly effective would be for all payments to be digital and this is set to happen regardless of anything to do with taxation. The bulk of financial transactions are already digital and the remaining portion of cash payments for legitimate purposes is rapidly declining.  It is extremely unlikely that governments will continue to maintain a complex and costly system of cash currency as its only remaining use becomes increasingly limited to purposes of tax evasion and criminal activity.

The immediate objection to any suggestion of an all-digital payment system with a transaction tax appears to be concerns over privacy.  However, this is a non-issue in two fundamental respects. For a start there would be no need for the complex, invasive and highly detailed accounting of income and deductions required by the present system. Privacy could also be easily offered by means of an alternative government provided cryptocurrency with a somewhat higher transaction tax rate but offering a security of both privacy and ownership which only a government is equipped to provide and that is a major risk in the existing open source cryptocurrencies. Likewise, non-government cryptocurrencies could quite easily be accommodated by a requirement to include a similar transaction fee be built into their systems.

If a transaction tax were to become the sole source of government revenue and it was required that government operate within its apportioned budget there would be large and numerous benefits, including:

  • Elimination of a gigantic non-productive tax compliance industry
  • Inhibition of non-productive trading churn and proliferating derivatives in financial markets with a bonus gain in market stability.
  • Billions of wasted hours freed for productive activity
  • Large gains in market efficiency with investment going toward productivity instead of tax advantage.
  • Realignment of the government/citizen relationship from that of “the government” to “our government”
  • Restoration of property rights to genuine ownership as opposed to tenancy subject to ongoing payment of ever-increasing rent in the form of various fees and taxes
  • Armed robbery, drug dealing, money laundering, bribery and indeed any crimes involving money would become much more difficult to conduct secretly and the proceeds much harder to hide
  • Counterfeiting would be relegated to history (North Korea would go broke from this alone.)
  • Tax avoidance would become a non-issue
  • Tax havens would become irrelevant
  • Repatriation of foreign profits would become highly desirable
  • Transaction based revenue would be much more stable and predictable for government than taxes based on income and profits
  • Much more accurate and near real time economic monitoring would become possible (a good alternative re-purposing for tax departments)
  • The toxic and divisive politics of resentment inherent in a progressive tax on income would be greatly reduced
  • First mover nations in such reform would enjoy major gains in both foreign and domestic investment
  • An extended boom in business and consumer confidence would almost certainly ensue
  • Having to operate within a budget based on a defined portion of national spending would greatly improve the dynamics of government. Any new activity would have to come from the existing budget, not just be added to it.  This would force government to prioritize, seek cost effective solutions and avoid unnecessary regulation.  It would also do much to re-establish the proper role of government as a servant of the people, not their master.
  • Inherent in such a system would be the capacity to use gross transactions to determine the money supply in a clearly defined and transparent manner.

It is important to recognize that wealth is not just money sitting idly in an account. It is a call on resources.  To be maintained, and hopefully to grow, most of it must be invested in productive activity. When this is successful wealth increases. In a free market unsuccessful investment soon flows into more successful hands. When productive activity increases, society is more prosperous. When too many resources are diverted from productive activity into non-productive consumption, prosperity declines.

Our current system of government centers on an endless round of consumptive spending to be paid with a blank check signed on the account of the productive sector of society with little or no assessment of cost or effectiveness.  The result has been an increasing diversion of national resources away from productive activity and an ever-increasing morass of bureaucratic demands and restrictions on virtually all productive activity.

Bloated government and unsustainable largess by government has engendered an endless scrabble for new or increased fees and taxes plus chronic deficit spending with most economies now circling the drain into a severe global recession.

A further highly beneficial potential of a single tax would also be the facility it presents to clearly define the portion of national resources to be allocated for governance.  Widespread experience of OECD economies strongly indicates that above about a quarter of GDP expenditure for government results in economic decline.  It also indicates that optimal revenue for government is achieved at a somewhat lower portion of GDP due to increased productive activity more than making up for the lower percentage. With a single tax this would not be difficult to estimate and easy to titrate up or down to find an optimum.

If this were combined with a prohibition on deficit spending it would mean that all activities of government would have to come from a clearly defined existing budget.  This would change the entire dynamics of government with costs, benefits, priorities and effectiveness becoming the governing considerations.

Normally chronic deficit spending by governments is relatively quickly curtailed by spiralling inflation ending in economic collapse.  In the US the capacity for deficit spending has been extended by the role of the US dollar in global trade.  This has enabled the effective printing of money in the form of US Government bonds with the resulting inflation being spread over the global economy instead of being confined to the domestic economy.  However, that advantage is unlikely to continue for much longer with China also approaching a capacity to offer a global alternative and numerous other nations likely to welcome such uptake for both perceived economic reasons as well as tall poppy motivations.  If a hard landing is to be avoided, the days of fat city are going to have to end and some serious cutbacks in government implemented.

In addition, the role of an almighty US dollar is now threatened with impingement by a global cryptocurrency such as Facebook’s Libra, and outlawing it is not going to be a viable option.  That would only assure the role would be filled by a version from China.  It would be beyond stupid for the US Government not to do everything possible to facilitate the success of a US based version.  Libra with the reach of Facebook behind it plus credit card companies and major financial institutions on-board should be well positioned for rapid widespread acceptance.

The current effort by Congress to have Facebook put a hold on further development of Libra to give them time to consider the matter is equally ill-conceived.  Surely having something in an actual form to examine must be more effective than trying to decide on myriad possibilities of great complexity before they even exist.  Meanwhile China is unlikely to agree to a time-out on their own development in this area just to provide the woke members of Congress time to unhurriedly discuss the hypothetical social justice and gender equity considerations of a cryptocurrency.

While the ascendancy of political correctness and the denigration of rational evidence-based thinking combined with the resistance of vested interests in the status quo probably precludes any avoidance of a hard socio-economic landing, it is not too soon to begin to think about what we might do when we finally do have to confront the inescapable necessity of fundamental change.

Walter Starck is one of the pioneers in the scientific investigation of coral reefs. He grew up in the Florida Keys and received a PhD in marine science from the University of Miami in 1964.