One reason I thought it was a bad idea to appoint a commission to study tax reform is that its members would waste a lot of time reviewing options that most tax experts rejected long ago.
I know from experience that everybody and his brother have some brilliant scheme to reform the tax system that may appear superficially plausible. But once it is subjected to careful political and economic analysis, one quickly discovers why no one has ever given it serious consideration.
Take, for example, the deceptively simple-sounding idea of taxing all financial transactions instead of income, profits or sales. Since the volume of transactions in the economy is many times greater than the gross domestic product, one could theoretically match current federal revenues with a very low tax rate.
One advocate of a financial transactions tax is economist Edgar Feige, who estimates that a tax of 0.6 percent (60 basis points), with each party to a transaction paying half, would be sufficient to abolish all existing federal taxes. He bases this on an estimated tax base of $337 trillion. By contrast, GDP is only about $12 trillion.
The tax would be assessed through the banking system, which would deduct the fee on every check, electronic funds transfer or credit card transaction. Currency would be taxed whenever it is deposited or withdrawn. Feige asserts that the collection cost of this tax system would be very low and that it is progressive because the volume of financial transactions rises with income.
While it is true that a tax of 0.6 percent on a base of $337 trillion would in theory yield $2 trillion -- about what the federal government will raise this year from conventional taxes -- it's important to remember that revenues still must ultimately come out of current production. All goods and services -- including capital investment and intermediate goods -- will have to be taxed dozens of times to get the federal government's current 17 percent share of GDP in taxes.
However, not all goods and services involve the same number of transactions. Thus, the burden of the tax will vary wildly depending not on the price of a good or its profitability, but solely on whether its production involved many or few financial transactions before it reached the final consumer. Jewelry will bear a low tax, while groceries will be taxed heavily. This makes no sense from a distributional viewpoint.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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