Sunday, November 20, 2011

Transaction Tax

Herman Cain, a possible United States Republican Presidential candidate rose to the top of the voter preference polls in October 2011 until disclosure of previous sexual abuse charges toward women was revealed in November.  His rise in the polls was due almost entirely to an economic policy he called 9-9-9.  His economic policy included a flat nine percent income tax, a nine percent national sales tax and a nine percent corporate income tax.  All these taxes would allow elimination of the federal tax code and generate the same level of revenue as the current tax system.  The simplicity of the tax law was appealing to the electorate since it implied fairness.

Another taxation method first proposed by Keynes in 1936 is much simpler.  Although Keynes proposed a "financial" transaction tax, expanding the concept to all monetary actions could provide revenue equivalent to the current the USA federal tax revenue.  The system could be further enhanced by Private Sector expansion into activities undertaken by peripheral federal agencies.

It turns out such a system only requires a 1% transaction tax on funds transferred from one account to another.  Since this transfer is accomplished by the Federal Reserve, collection of the 1% is properly considered a fee and not a tax.  The Federal Reserve would extract the 1% fee as the payment moved from one party to the next.  Such an idea has broad political support.  Steiglitz said such a system with collection by the FED or ECB is practical in this day of electronic money.  Krugman said, "It is about time."  I have promoted the idea in my book Rule of Money.

Instead of taxing at a rate of 9-9-9, it is possible to structure a federal funding system of none-none-none-1.  The 1 being a transaction fee of 1% on all transfers of funds or wealth.  To make the system fail safe it is necessary to eliminate all bills and currency and only use electronic money.  There are numerous advantages of this change.  First, it would collect a fee for illicit activities that go untaxed.  Essentially, the drug and sex trade would be revealed.  No longer would it be possible to transact drug sales on street corners.  No longer would the girls and patrons of the sex trade be anonymous.  All this exposure would enable police to better enforce the laws of the country.

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