While the weight of taxation continues to shift to the backs of the working and middle classes and onto the books of small businesses, Congress dithers about reforming the "broken" income tax code and President Obama proposes a "grand bargain" to reduce the corporate tax rate even more. Instead of further gaming the system, they should get rid of our unfair, outdated and complex system of income taxation altogether. Taxes on income should be entirely replaced with an easy toll tax on the financial highway which would balance the burden of taxation with the benefits of government.
Wouldn’t it be more sensible and much fairer to simply tax the movement of all money in our economy? Not a sales tax, not a value-added tax, not a flat income tax, not a speculation tax, but rather an easy toll tax on every single financial transaction within our economic system. Not just every time you fill up your gas tank, but every time stocks and bonds are bought and sold, every time currencies, derivatives, futures and options are traded, every time banks borrow and loan money, and every time Exxon-Mobil buys a new oil rig.
Since the working-, middle- and small-business-classes have far fewer and much smaller financial transactions, the wealthy elite and the multinational corporations, who spend a lot of money avoiding having any “taxable income,” would share proportionally in paying a toll for their traffic on our economic roadways, their use of our courts and institutions to enforce their contracts and the use of our infrastructure to facilitate their profits.
Why should so many of our largest corporations completely escape payment of income taxes?
The federal government could comfortably operate on revenues produced by an easy to calculate and simple to collect "toll tax" of less than one percent on the movement of all money. For example, the 2012 trading volume of the Chicago Mercantile Group, alone, was $806 trillion. The year before it was $1 quadrillion! A one percent tax on this single financial casino that gambles in derivatives, futures and options would produce $8.6 trillion, which is more than double the 2012 U.S. federal budget.
Most fundamentally, the payment of a financial toll tax would shift most taxes to those who most benefit from our government, from individuals to the corporations and from the laboring poor to the wealthy elite. The tax would also help curb the virtually unregulated speculation (gambling) in financial products that risks the security of every individual.
Envision the effect of a slight "touch" every time money moves, a tiny “ka-ching” in the US Treasury’s cash register, which in the aggregate would quickly add up to the trillions of dollars required each year to operate the government.
Think about the debate in Congress as to whether the toll tax rate should be .25 percent or .27 percent for the next year. The difference would produce billions, and the government's books could be balanced every fiscal year.
Imagine − most of us would only have to pay an annual tax of less than one percent on what we (earn and) spend and no tax on income or capital gains. For most taxpayers and small business owners, spending is virtually equivalent to earnings, and the result would be a substantial reduction in personal taxation. The toll tax would necessarily cause a slight increase in the overall cost of the goods and services we purchase, which would still be substantially less that the present tax on personal and small business income.
The toll tax would apply to all financial transactions, including money manipulations by large corporations and the wealthy elite, who presently rely on every imaginable scheme to avoid having any "income" upon which to pay taxes. Those who enjoy luxuries would pay more for them, and those who gamble in the money markets would have to pay for their visit to the economic casino.
A tax on all financial transactions would be far more equitable than a "flat income tax," which would further shift the burden of taxation from corporations and the wealthy, who hide their money, to the rest of us who have our taxes withheld from our salaries or retirements. The rich would simply pay a fair toll based on their transactions and monetary manipulations.
A toll tax would be similar in some respects to a value-added tax; however, it would apply to all financial transactions, not just intermediate sales involved in the production of goods and services. Just as a worker’s income tax contribution is currently "withheld" from his or her payroll check every week, the tax on financial transactions could be "withheld" every single day at the close of business by all financial institutions.
Except for the final sale, the transaction tax would be calculated and withheld at every stage and paid quarterly by businesses as they presently do. The rest of us would continue to file our annual tax return listing what we earn, spend, save or give away. There would be no federal sales tax.
A "transaction tax" was believed to pose impossible accounting problems when first proposed by James Tobin 40 years ago; however, computer technology now provides instantaneous posting of all financial transactions. Every bank and clearing house already tracks every transaction and collects fees.
To encourage savings, money invested in Social Security, federally-insured savings accounts, 401(k)s, IRAs, and earned interest should not be taxed until it is withdrawn and spent.
To encourage investment, capital gains should not be taxed until they are realized and spent, and increases in the value of investments should not be taxed until they are sold and the proceeds are spent.
To encourage giving, donors should not be taxed; however, the recipient should pay a tax when the gift is received and the money it produces is spent.
A toll tax would operate somewhat like the current income tax in that individuals, small businesses and corporations would still have to prepare tax reports of income and distributions. The preparation of tax returns, however, would be simplified and tax fraud and avoidance greatly reduced.
Let’s say a married couple earns $100,000 of joint income. Employers would still prepare 1099 and W-2 forms, and the couple would file a return setting forth their "income." They would then deduct the amount paid for their own health insurance, including Medicare payments, and further reduce their transactions by the amount paid into Social Security, IRAs, 401(k) plans, and into federally insured savings accounts. Essentially, from a policy standpoint, these payments are not "spent."
Moreover, the average annual personal cost of necessities, such as food, housing and clothing should be calculated and used as a standard deduction by all individuals who are not receiving public welfare support for these items. We would pay taxes only on the amount of "income-spending" that exceeded this bottom-line cost of living, less other policy disbursements, such as savings, gifts and medical insurance not included in personal "spending."
When all of these "deductions" are added up and subtracted from income, the difference between that and the $100,000 joint income would be what the married couple actually "spent" during the year. That would be the amount taxed – at a very low and easy rate. If $50,000 was left over, even a one-percent toll tax would only be $500.
There also would be great benefits to large businesses and corporations. To the extent they are owned by US citizens and their salaries are paid to US citizens, businesses, corporations and other organizations should not have to pay a toll tax on their payroll, as salaries would be directly passed through to their employees to spend (and to be taxed) in the United States.
Thus, if 100 percent of a business or its stock is owned by American citizens, the business should not have to pay any taxes on the salaries paid to its American workers. Or, if 25 percent of a business is foreign-owned, the business would pay one-quarter of the toll tax on its payroll.
Payrolls paid to foreign workers by American businesses should, however, be subject to the toll tax, as the money would not pass through the US economy. This provision could reverse the current trend of "outsourcing" American jobs offshore to other countries.
While a good case might be made for a few public policy tax deductions or exemptions, such as the interest on home mortgages and the payment of other state and local taxes, an equally good case could be made to eliminate every exemption and to close all loopholes.
Finally, while the Earned Income Tax Credit was well intentioned, it has encouraged wide-spread fraud and many resent it as a socialistic redistribution of income. The credit should be eliminated and all spending above the bottom line cost of living should be subject to the toll tax.
Every individual, rich and poor, and every business, large and small, should fairly contribute to a broad-based, simple and easy toll tax that benefits all and hurts none.