A Payments Tax Sounds Too Good to be True - Why Hasn't This Been Done Before?
The most common response to a Payments Tax is that it sounds too good to be true. One way to think about the feasibility of a Payments Tax is to compare it to the feasibility of what we are doing today. If there were already a small Payments Tax in place, our national budget were balanced, and there were no federal debt, think of how you would react to the proposal that you should start paying 40% of your income in taxes, an extra 8% in sales taxes for everything you bought, and a third more in excise taxes for gas, phone service, and travel. And if the suggestion was topped off with the projection that your government would end up with a half-a-trillion dollar deficit each year and $20 trillion in outstanding debt, it’s likely you would see that as an awful idea. So which is the greater stretch—what is being proposed, or our current system?
Who Loses With a Payments Tax?
The reason a Payments Tax works so well is that it taps every payment. Only a tiny fraction of payments are taxed today—those payments that we deem to be “income.” With the Payments Tax we would be taxing the monetary economy so it pays its fair share of taxes. Essentially we would be exacting a tiny squeak from an enormous monetary balloon that dwarfs the material economy we live in.
It is the ultra-wealthy that play money games in the giant balloon that stand to lose with a Payments Tax. However, it is possible that even they may end up benefiting, as the business of “making money off of money” is indexed to the real economy. In other words, as the real economy booms from the elimination of income taxes, the growth in the economy from abolishing income taxes would expand the balloon faster than the Payments Tax shrinks it. Thus, the Payments Tax could end up being beneficial for the powers-that-be that run the monetary economy.
Where Do All These Payments Come From?
The Bank for International Settlements publishes the Red Book, which reflects the total volume of financial settlements (payments) that are made in the U.S. each year as reported by the Federal Reserve. You can download your own copy of the Red Book (or visit: http://www.bis.org). Turn to page 425 in the 2015 Red Book to find the volume of payments made in the U.S. and look for the following tables:
Table 11 shows CHIPS, Fedwire, checks, ACH, and on-us payments in 2015 totaled $1,567 trillion among banks.
Table 8 shows the use of payment instruments, ACH, cards and checks in 2015 totaled $171 trillion among non-banks.
Table 21 shows transactions at the NSCC and FICC in 2015 totaled $1,231 trillion.
Table 26 shows transactions at the DTC and the Fed in 2015 totaled $408 trillion.
Table 18 shows trades on the NYSE and Nasdaq in 2015 totaled $36 trillion.
Table 6 in the BIS’ FX Turnover Publication shows U.S. FX trades at $311 trillion in 2015.
Table D12.2 in the BIS’s OTC IR Derivative publication show U.S. trades at $310 trillion in 2015.
The CME Group has publically reported settlements exceeding $1,000 trillion annually since 2014 (see http://openmarkets.cmegroup.com/9685/todays-number-more-than-1-quadrillion-traded-in-2014).
The grand total is $5,034 trillion—and this is not an exhaustive list of the flow of money in the monetary economy. There are more payments being made each year in the U.S. than this. This figure represents those payments that would be easy to tap into.
Wouldn't it be Difficult to Implement a Payments Tax?
Implementing a Payments Tax would be easy. It would not require new government agencies, nor would it require 73,954 pages of tax code as our current system does.
The Payments Tax would involve a single adjustment to the clearing process for financial institutions. If you deposited a check for $1,000 into your bank account, the bank would automatically deduct the standard tax on payments and credit you $998.
It would not matter whether money was paid into a bank, a non-bank such as a credit union, or a securities clearinghouse—a small portion of each payment would be an automatic part of the clearing process. Since every payment would be taxed, enforcing fair and consistent taxation would be easier for the government to manage, and a more difficult system to game for those who try to avoid paying their fair share of taxes. Of course, there would be less incentive for individuals to try to avoid paying taxes. Whereas today federal income taxes might take up to 39% of your personal income, the Payments Tax would be miniscule. It’s not likely that many would object to paying one tenth of one percent.
How Would a Payments Tax Be Collected?
Instead of taking the money deducted from a payment and crediting it to an account for transfer to the Treasury Department, as we do with income taxes, it would be better not to credit the money to any account at all. The idea of not crediting money to an account may be a bit challenging to conceptualize, but it actually would serve an important purpose. It would effectively delete the money collected under the Payments Tax from the money supply, while from the taxpayers’ point of view it would appear as a discount applied to the electronic clearing process.
If we implemented the Payments Tax in this way, we could utilize the Federal Reserve to create the money that the government spends. The money created by the Fed would then enter the economy via government spending and essentially replace the money deleted by the Payments Tax, which would balance the money supply, or more accurately, mitigate inflation.
There are several economic advantages to this way of implementing the Payments Tax. First, it would be highly efficient, since it would eliminate the overhead associated with having to aggregate tax revenues and transfer them to the Treasury. Second, it would eliminate the need for and the cost of financing to bridge the inevitable gaps between the processes of collecting revenue and spending. And third, it would enable the Payments Tax to be utilized as an economic stabilizer.
How Would a Payments Tax Affect Me?
What would the Payments Tax mean for you personally? What would the benefits be for individual citizens?
Today, a single, self-employed person earning $30,000 per year pays around $6,000 in income and social security taxes. With the Payments Tax, their tax bill would plummet from $6,000 to a mere $60. Quite the pay raise indeed!
Compare this to a single, self-employed person earning $50,000 per year who pays around $12,000 in income and social security taxes. With the Payments Tax, their tax bill would fall to just $100.
Are you married? A married, self-employed couple with two children and a combined income of $100,000 pays over $22,000 in income and social security taxes. With the Payments Tax, their tax bill would be only $200. The extra $22,000 per year would be a game changer for a family raising children.
How Would a Payments Tax Affect our Nation's Economy?
Because a Payments Tax would put more money in our pockets, consumer spending would increase and our nation’s GDP would skyrocket. Since businesses would no longer pay corporate or FICA taxes, they’d have more money to expand and hire new employees. In addition, the cost of complying with our complex tax code would be eliminated, so businesses could put that money to productive use. And without a deficit, our national debt would no longer increase. Together, these factors would propel our economy to new heights. But the benefits of the Payments Tax go beyond this.
Under the Payments Tax, companies would no longer use foreign nations to hide from U.S. taxes. Foreign tax rates are higher than the Payments Tax, so the problem of “inversions,” or companies moving their headquarters offshore, would be solved. Instead, we’d see a return of the dollars that multinational companies currently stash offshore, which would increase the volume of payments in our nation. Eliminating income taxes would also bring a flood of money from foreign corporations and individuals into our country, resulting in increased investment in our economy and even more payments.
The Payments Tax would also save Social Security. According to current estimates by the Social Security Administration, the trust funds supplementing the payment of benefits will soon be exhausted. At that time, benefits to retirees will need to be cut and/or FICA taxes increased. In other words, the Social Security program is already insolvent with expenditures exceeding receipts; the program is in its final stages of unraveling. The Payments Tax would eliminate this ticking time bomb, bringing solvency to our Social Security program.
Wouldn't a Payments Tax Reduce the Volume of Payments?
One aspect of the Payments Tax to consider is whether it would negatively impact the volume of payments. Because the Payments Tax is such a disruptive technology, it would affect many aspects of the economy, each of which would influence the volume of payments. Thus, in order to gauge the net effect of the Payments Tax, one must assess the combinatorial effect of the Payments Tax on the total economy.
The implementation of the Payments Tax would chase away some settlements. In terms of the volume of payments, that would represent a downward vector of a certain magnitude. At the same time, however, the elimination of personal income taxes would fuel a boom in consumer spending, producing vigorous growth in the economy. A strong bull market would be an upward vector of significant magnitude in terms of the volume of payments.
The elimination of corporate income taxes would also serve to bolster stock prices, adding fuel to a bull market. In addition to this upward vector, the end of corporate taxes would result in a flood of money coming into our economy as companies move the capital they have stashed overseas into domestic accounts. The tax rate of the Payments Tax is much lower than the tax rates of the countries where that money is now domiciled, and the influx of this capital would be a strong upward vector, fueling growth in the volume of payments.
Just as the Payments Tax would incentivize U.S. companies to move their overseas cash into domestic accounts, it would provide the same incentive for foreign companies and wealthy individuals to move their assets into our country. With the Payments Tax, therefore, we’d create an economic environment with a net effect of rewarding participation in our markets rather than chasing away transactions. Basically, the Payments Tax would result in a surging economy, which would mean net positive growth in the volume of payments.