What is the Best Transactional Tax Idea?

In the mainstream of ideas, there are two main ideas for a transactional tax format. The first and most known is the Fair Tax, and the second less visible is the APT Tax. My idea of the CUT Tax falls closer to the APT Tax.

I was a proponent of the Fair Tax when it came out in the mid 90’s. I thought at the time it was the best and more realistic alternative to the Income Tax System at the time. Now I am having serious doubts of the Fair Tax model. Many of these doubts arise from current economic structure of our times.

No longer is the main area of growth derived from retail sales. Most personal wealth does not arise from building and selling a retail item. We are shifting to an economy driven by providing services and knowledge, and a large percentage of these services are going to provide goods and services to entities that would be completely free of any taxes. Choosing a Fair tax may lead to taxing a diminishing base.

The biggest issue against the Fair Tax I have is that it creates a relatively small pool in which to collect taxes on. It creates a false premise that government should reward investing, and punish spending. And this is a false premise because it views any spending within an organizational setting to be valid.

An example of this would be a car rental agency may be able to purchase their fleet tax free. This is because they would collect the Fair Tax when they rented out their vehicles. And this would be a reasonable exemption. However, let us expand this concept out to the next level. Suppose the lease is to a business. Then the tax would not be applicable on the end user. Therefore, you have created an incentive for a business to shelter a personal vehicle under a false premise.

Now the natural reaction from the individual that had to buy or lease a vehicle and pay the expensive end user tax would be either to create a business or non-profit, in order to make use of this loophole, or to complain to their representative about this unfair advantage. This will eventually lead to the auditing of every transaction within organizations to ensure that this allowance is not abused. So, instead of eliminating the concept if the Internal Revenue Service, you will just restructure the framework and grant it more authority within the individual states.

If the Fair Tax is enacted, I see a huge shift of popular support to the APT Tax, (Automatic Payment Transfer Tax).

Most of the problem I see with the APT Tax is that it is structured to make the Tax or Fee artificially low to the individual. I believe the 0.35% mirrored rate is a little too optimistic. If it was enacted, I believe a full third of the revenue projections will evaporate by market efficiency.

Now I take issue with the mirrored aspect of this tax, I see it as a way to create an artificially low tax rate in order to promote the growth of centralized government. I mean how can a wage earner complain if all they are paying is 35 cents on every $100.00? However, the true tax would be closer to 0.7%. Which still looks inconsequential until you realize that a majority of the tax becomes embedded into the final cost of every item. This effect is harder to quantify to the individual.

To explained the mirrored tax. They split the tax to be paid equally by the sender and receiver. So, if you have a $1000.00 payroll check, you pay $3.50 upon deposit into your account and the issuer pay $3.50 to issue the transaction. Now you as the receiver would only pay the other 0.35% if you transferred money or bought something else from your account.

In today’s electronic environment, it is unwise to keep your money in one account, and the people who have accounts in financial institutions generally have multiple accounts. You may have a checking account, savings account, retirement accounts, and various credit type accounts. And you will be charged basically both sides of this fee when transferring money from one account to another. This will create a disincentive to create multiple accounts. And in today’s environment of identity theft, it is advisable to have multiple accounts among different financial institutions. Most cases of identity theft can be rectified over time. However, you may need access into an unaffected account until the charges are reversed and you receive a new card issued to the affected account.  I have learned this lesson first hand lately. During the summer, my primary account was compromised three separate times, and most happened over the weekend, without access to money from other unaffected accounts, we probably would have not been able to get fuel for the car or groceries for the weekend until the next business day. If you tax lateral transactions then you encourage the individual to keep all their eggs in one basket.

Now, the CUT Tax (Currency Use Tax) functions like a transactional tax but is only triggered if you receive new funds from an unaffiliated source. It is based on the notion of Gross Revenue, and any lateral transactions within the family of accounts would happen tax free. This could be done with computer protocols and would not need a bureaucracy to manage compliance. All transactions could be monitored by the financial institutions which in turn are already monitored by state banking regulators and the FDIC. So no new enforcement agency created with no new powers granted to the preexisting regulators. The trade off is a higher transactional tax than the APT, but significantly lower than the Fair Tax. It should be around 4%. And it does not distinguish between use or type organization. All organizations and individuals would have the same flat fee based on gross.  Thus no tax advantage to creating organizations, only legal advantages such as Limited Liability.

In my opinion, the battle between the Fair Tax and the APT Tax are battles designed to push a political agenda. One is to protect and expand the consolidation of wealth, and the other is to protect and expand the consolidation of the Central Government.  Both ignore the concept of unintended consequences in the promotion of their agendas. I see my option as protecting and expanding the middle class. That is my agenda, the very rich and the poor will always be with us, so work on a system that promotes the middle.