Other ways to collect taxes

2016 March 24
by Daniel Lakeland

We have an income tax, largely because forcing companies to be tax collectors via withholding and tax reporting etc was the only practical way to accomplish taxation at the required amount to finance WWII. But, at that time (1943) we had about 1 computer in the whole world, and it was significantly less powerful than a Casio pocket calculator.

Today, VISA, MasterCard, and American Express together process on the order of 6 Trillion dollars a year of transactions. That's around $20,000 per capita in the US. Each one is stored in a computer reliably, processed quickly, and all of the auditing and accounting technology is in place already.

There are also checks, and electronic bank transfers such as ACH. Each transaction is stored in various computers, accounted against massive redundant reliable databases. Special computer systems exist so that you can walk into a server room and literally YANK OUT THE PROCESSORS and replace them with with new ones without interrupting the processing of financial transactions. Perhaps these days, these kinds of reliability are moving to clusters of redundant computers, but the principle is the same, financial guys know how to keep the finance system running even if a once in a few thousand years scale of disaster occurs, and they tend not to lose a penny in millions of dollars of transactions (ie. accuracy of 1 part in 10^8 or better).

With crypto-currencies the latest new thing, we could argue about how they might affect my proposal here, but ignoring that for the moment, a perfectly reasonable way to collect taxes would be to put a simple overhead tax on purchases processed through our existing financial system. Now, the actual revenue collected by the US in 2010 was 2.2 Trillion. And that amount is about 40% of just the card transactions processed by VISA, MC, AMEX etc. Place a tax on ACH, Check, and Card transactions of say 20% and you're likely to completely cover the entire US budget, at essentially NO overhead cost (because the computer systems to keep it accounted for are already in place, sure there's a minor cost to upgrade the software to handle this, but it's gotta be far less than the cost of having everyone fill out 1040 forms for just ONE year).

Note, the actual tax rate required is uncertain, especially as transaction volume might decline since people would be taxed on their spending, and you'd have to tax cash transactions at stores as well, or we'd see a massive run on cash. But the federal reserve report linked at the end of this article suggests that ACH accounts for 83% of the dollar volume, so we expect that our revenue could be accomplished at < 40% tax rate. GDP in US was 16.7 Trillion. Revenue was 2.2 Trillion, that's about 13% so that puts a lower bound. Somewhere between 13% and say 35% tax on consumer Credit, Debit, ACH, Check clearing, etc would be required.

But, you say, this is horrible, because the poor spend so much money just on the basic things they need, etc etc. Well, combine this with a Universal Basic Income, and an automatic deposit of that UBI from the govt into a bank account, and now the poor have a decent bank account (something many lack today, hence the popularity of check-cashing places), a safety net that acts like a tax rebate, and we have NO income tax administrative overhead. Furthermore, there is now a definite disincentive to consume, but no disincentive to produce (we'd exclude ACH payments of wages, and payments between businesses etc, so that only end-consumer consumption was taxed).

I bet the TurboTax people spend MILLIONS each year to make sure this doesn't happen. Why yes, yes they do.

Interested in details of financial payment methods? See the Federal Reserve 2013 Study.


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