The transaction tax is the national tax

Some people might consider the transaction tax as applied in the Fractal Economy is a clever little artifice invented to generate some communal funds. We take the notion of being a fractal economy seriously, meaning that there is no key element ('core practice') within our economy which is not transferable to, and appropriate for, a national economy. In a fractal, the parts exhibit the same qualities as the whole. In other words, we are saying that the transaction tax should be the national tax, replacing company and personal income tax; as well as the goods and services tax (GST, which is called VAT in some countries) which resembles part of it.

There are some more refined arguments for the idea of a transaction tax, arguments which revolve around what ‘income’ really is; but we shall restrict the discussion here to more ‘practical’ matters. The main arguments for a transaction tax as the national tax can be summarised like this:

  1. The current taxes are inefficient, costly and ineffective. A transaction tax is none of these.
  2. Corporations pay the same taxes as individuals. There is no avenue for avoiding and evading taxes; and there are no tax advantages in ‘incorporation’.
  3. Our current tax system creates a wasteful economy
  4. Marginal taxation penalises those who want to be very productive.
  5. High tax rates encourages people to deal in cash to avoid taxes
  6. The transaction tax will slug and kill off the speculative economy.
  7. Half-thought out and half-implemented precedents to the transaction tax.

Current taxes are inefficient, costly and ineffectivePersonal income and company taxes as they stand are extremely cumbersome for individuals and companies. The Australian Taxation Act is some ten thousand pages long and growing (to plug up the loopholes that ‘creative’ people are discovering).

The problem is that our current taxation system taxes profit and not income per se. Profit is defined as revenue minus costs. It is the factoring in of costs as tax deductible expenses which creates this maze (or bog depending how you look at it) that we call our taxation system. Corporations in particular can find all sorts of ways of making all kinds of expenditure into tax deductions, so that they hardly pay any taxes.

By discounting costs from the tax equation, we also discount profits from the same. What we have left is sales from which we can apply tax. To put it another way: if we just employ the simple measure of not taxing profit but taxing monetary income (or receipt), we have the result that no costs are tax deductible – and everything becomes much clearer, fairer and efficient.

Some people like mathematical equations for their elegance. To put the above into an equation, we would write

Profit = Revenue (Sales) – Cost.

This is what we base company tax on. If we strike out cost from the equation, ll we get is a tax on revenue-sales

Some business people will argue that they do incur costs that they absolutely would not incur if they were not in that particular line of business, and that therefore these costs should be tax deductible expense. Every business and individual partaking in the economy passes on every cost incurred in the process of offering their good or service on the market. Take a person who works as a cleaner. His income must cover all the expenses that he incurs in order to provide his service. These expenses do not just include obvious ones like his cleaning chemicals; it includes things such as his home heating bill, his grocery bill, the maintenance costs of his house – in short, everything. The cleaner incorporates all these costs into either his contracts or his wage demands. He cannot live otherwise. Whether we deal with a person working as a sole trader and contractor or with a large corporation, everyone has to cover all their expenses incurred. Who pays for these expenses? The answer: the purchaser of the services or goods. In short, no-one can complain that they have costs that should be tax-deductible - “Pass on your costs to your customers like everyone else” is the reply to this complaint.

Another problem with the current taxation system is that people have to hang on their invoices and receipts until they fill in a tax return. They then have to itemise it and enter it in various columns and spreadsheets, and so on. After filling in their tax return, they may find that they owe money to the tax department - money they didn't put aside or miscalculated on. Then they have to find the money or borrow it. With a transaction tax, tax is collected straight away (by the banking system) with the receipt of any money. There is no need to hang on to receipts, filling in tax forms, or be concerned about owing money to the tax department.

The Australian Taxation Office spends a lot of money and man-hours trying to clarify and define what income and profit is; and then quibbling with individuals and corporations on how much tax they should be paying. The ten thousand pages Tax Act could be reduced to two pages that anyone can understand.

Corporations pay exactly the same taxes as individuals with a transaction taxBecause of the problem mentioned above in which we are taxing profits, and therefore taxing ‘revenue - costs’, we create an immense amount of wriggle room for corporations to avoid taxes. In Capitalism, things like share dividends, pricing of assets (for capital gains), currency exchange rates, rolled over profits, depreciation, interest payments as a tax-deductible cost; and a whole lot of complex financial tools make it impossible to really measure ‘profit’. Particularly in the case of pricing assets and liabilities using the so-called 'mark to market' to assess the 'fair market value', we encounter territory which allows companies a lot of leeway to make things up. (In the fractal economy, these assets wouldn't exist as privately owned entities, and therefore there would never be any capital gains or losses to estimate.)

Corporations take advantage of this situation and spend billions in dodging taxes. Obviously it must pay to ‘invest’ these sums to avoid paying taxes; otherwise they wouldn’t do it. With a flat transaction tax which would be applied even to the purchase of financial ‘products’, corporations will have to pay proper tax. As soon as money is transferred from one bank account to another; regardless of whether its is paid for a bag of apples, a car service, shares or a derivative; tax is paid.

Two particular areas of our tax practices should be mentioned.

One is the notion that interest payments should be tax deductible. In the previous section, it was pointed out that all costs that are borne by a business should be passed on its customers. There should be no reason for making any costs tax-deductible. Individuals on the whole do not get tax deductions for their interest payments (until they incorporate). Neither should companies. The tax deductibility of interest repayments benefit not just corporations; it also benefits private banks because they get to make more loans.

Another area which is of great concern to national governments is multinational companies not paying their local taxes. A common practice is transfer pricing in which a company pays an artificial cost like royalty payments to an overseas subsidiary of the parent company. The subsidiary will be located in a low-tax country like Singapore. The ‘cost’ lowers the profit margin to as low as the company thinks it can get away with, and renders its income/profit tax-free in the host country. With a transaction tax, the practice of transfer pricing will only make the company pay their taxes in two different countries.

As a philosophical principle, it is important to understand that an artificial person – a company – should pay exactly the same taxes as an real person. The transaction tax can do this.

Our current tax system creates a wasteful and rapacious economyAssume that a company or sole trader’s tax rate is 30%. When that company buys a product, say a car, that effectively means that the company gets a 30% discount on the price of the car. A $50,000 car costs $35,000 after tax deductions. This discount makes it too easy to buy things that one might otherwise refrain from if one paid full price. In a rather strange sort of way, this tax deductibility makes it a kind of [popup_anything id="3185"] - a cost which society has to pay (because the tax shortfall has to be picked up elsewhere) and by Nature (because wasteful consumption is encouraged). Again, it is mostly corporation that are encouraged and supported in this way to be wasteful.

Marginal taxation penalises those that want to be very productiveBecause of the situation within Capitalism in which the very wealthy get even wealthier on account of unearned income and asset appreciation, we are left with a large majority without enough income and spending to support our public revenue needs via tax payments. The way to address this issue has been to require the rich to pay a higher rate of tax than the poor. So the higher a person’s income is, the higher his tax rate. This is called marginal or progressive taxation. This ‘solution’ tries to address the outcome, not the cause, of the problem.

If a person is a highly regarded top notch architect and the ‘market’ is willing to pay her a lot for his services, then she should not be penalised for her high income with a higher tax rate. Alternatively, imagine someone who works as a chef and is happy to work ten hours a week. If he chose to work say fifty hours a week and earns perhaps five times as much, he should not be penalised for earning more – he is producing more for his higher income. When our society tries to address the issue of raising enough taxes by getting the wealthy to pay a higher rate, it is approaching the problem inadequately. If, as is the goal of the fractal economy, people cannot make unearned income, then all income is proportional to one’s contribution to production; and the tax rate should be flat. Marginal tax rates is a disincentive to people being as productive as they want to be.

High tax rates encourages people to deal in cash to avoid taxesBecause our tax system allows for costs to be a tax deduction, it requires in turn a high tax rate to generate an adequate amount of tax revenue. So instead of a transaction tax rate of say 5-7%, we have to raise tax rates to about 25-30%. This high tax rates encourages people to take payment in cash and avoid declaring their income. At 30% tax rate, an undeclared income of $100 saves a person $30. There is far less incentive to defraud the public if the tax rate is 5-7%.

Slugging and killing off the speculative economySpeculation – buying and selling assets in the hope of making capital gains – leads to financial crisis and recessions large and small. It creates havoc with our economy. A proper transaction tax, in conjunction with the knowledge that none of these speculations do anything positive for the economy, will kill off almost all these speculation. The average time in which a share is held is 20 seconds. So we as a community could apply a transaction tax on share trades, and also for trades in options and derivatives and currencies and any kind of financial product. A transaction tax will almost certainly kill off the latter trades. The real economy in goods and services will not be affected. The havoc which these trades have created, and will create, will be stopped in its tracks.

Please note: a transaction tax as described here should not be confused with what some have called a financial transaction tax. We are talking of a tax rate in the vicinity of 3 to 7%, and is applied to financial trades as much as trade in goods and services. Debates on financial transaction tax rates are of the order of 0.2%

Precedents and comparison to the GSTThere have been many proposals which are similar to what we call the transaction tax. We do not consider the financial/speculative economy as contributing anything positive to the economy so we would not be afraid to tax it at the same rate as trade in goods and services. So where similar taxes such as the Tobin Tax are talking of the order of 0.5%, we believe a 3-7% tax rate applied to all transactions will sort out any country’s tax revenue needs without stifling its productivity.

Many Latin American countries have implemented bank debit taxes which in effect is a transaction tax. However their tax rate has been on the whole less than 1% which is not enough to replace personal income and company taxes.

The GST looks like a transaction tax, but fails on a number of levels.

Firstly, it needs to be applied to all transactions, regardless of whether the trade is in goods and services or some financial product.

Secondly, businesses are allowed to deduct the GST payments they have made from the GST they have collected on behalf of the government. This means that the GST does not collect anywhere near the amount of taxes that its rate would suggest.

Thirdly, the GST is an extremely time consuming tax for businesses large and small to collect. With a proper transaction tax, no-one ever needs to do any kind of tax return or keep receipts for the same.