Is the government serious about a substantial change in tax policy?
As we weather a financial crisis, sit on more than $13 trillion in public debt, and stare unsustainable entitlements in the face, it’s no secret that a resurgent movement for lower debt and smaller government has made its presence felt. There are a myriad of ideas out there on how to corral the debt. H.R. 4646, a 1% tax on all transactions using a payment instrument, is one such idea.
During the recession, the Obama administration has mostly focused on stimulating consumer spending and filling in the short-run hole of a contracting/flat economy with government spending. As their ten-year budget indicates, the Obama administration is betting on the American economy growing its way out of the substantial debt they’re prepared to tack on over the next few years:
Fiscal 2011 budgeted deficit: $1.56 trillion
Fiscal 2012 budgeted deficit: $1.27 trillion
Fiscal 2013 budgeted deficit: $727 billion
Fiscal 2014 budgeted deficit: $706 billion
Fiscal 2015 budgeted deficit: $752 billion
Fiscal 2016 budgeted deficit: $778 billion
Fiscal 2017 budgeted deficit: $778 billion
Fiscal 2018 budgeted deficit: $785 billion
Fiscal 2019 budgeted deficit: $908 billion
Fiscal 2020 budgeted deficit: $1.003 trillion
Total Ten-Year Budgeted Deficit: $9.267 trillion
Considering we already have more than $13 trillion of public debt, that is a lot of growth to be betting on — interest payments on the debt are more than $300 billion as it is. And that’s assuming the budget projections are accurate, which they rarely are. We all know the government can’t continue to spend at this rate.
Meanwhile others suggest that perhaps consumption, by individuals and government, isn’t exactly the path to economic growth; that actually savings, investment, and production are key if we’re serious about growth and tackling the underemployment problem. How can we argue there isn’t enough consumer spending when Americans spend virtually every dollar they make? The economic model driven on 70% consumption is obviously flawed. As individuals and businesses have tried to de-leverage themselves and boost savings during the recession, the US savings rates is up to 7 cents on every dollar of disposable income. That, for Americans, is impressive, but hardly when compared to China. The Chinese have managed to save around 30-50% of their disposable income since the 90s. Excessive? Yes, the Chinese have a real paradox of thrift on their hands. But those savings have put them in a position to invest and grow their economy. And it is presumably easier for individuals to transition from low or no debt and massive savings to increased consumption, than it is from high debt and low or no savings to, well, wherever Americans are trying to go.
In addition to growing our way out of the deficit, the Obama administration will explore ways to increase tax revenues, while continuing to monetize debt. Enter the debate on whether to extend the Bush tax cuts for select groups, a topic which deserves its own article. Taxes of any kind take away from savings, capital formation, and investment. And where does money for consuming come from? Jobs, rising incomes, and savings. With underemployment, cut compensation, net worth 50-75% what it was, and virtually no savings, how can we consume the economy forward? And, by the way, what are we consuming? Generally products made abroad, increasing the trade deficit.
With anti-government sentiment out there, H.R. 4646 awaits a vote which would institute a 1% transaction tax, while dangling the carrot of phasing out the federal income tax by 2017. H.R. 4646 is coined The Debt Free America Act. Its stated purpose is to raise sufficient revenue from a fee on transactions to eliminate the national debt within seven years and phase out the individual income tax. The 1% fee would be imposed on transactions that use a payment instrument, including any check, cash, credit card, transfer of stock, bonds, or other financial instrument. Said fee would be offset by a corresponding nonrefundable income tax credit. Variations of the transaction tax have been floated which would soften the flat tax impact on the poor. The Treasury could exempt certain transactions on which lower-income people disproportionately rely or exempt all transactions below some threshold (say $500).
As a result of the transaction tax, every $1.00 you run through a personal checking account would be taxed at 2% (once going in and once going out). Considering at the end of Q2, households held $170 billion in checkable deposits and currency, $6,228.7 billion in time and savings deposits, and $1,109.5 billion in money market fund shares alone, it’s safe to say this could be quite a windfall for the government.
As SwiftEconomics readers know, I advocate a Fair Tax. I’d be open to a 1% transaction tax concept and anything that simplifies the current system, though call me skeptical that the federal income tax would get axed by 2017, if at all. I am to trust the government to make a substantial paradigm shift in taxation, one they have shown absolutely no inclination of in the past, while they impose this additional tax on me in the meantime? Seven years is an eternity. What assurances do we have? Certainly not history.
If our government is serious about a substantial change in tax policy, it’s time to get this discussion going. Loudly. The legislation will likely be voted on during elections, and politicians may try to pass it after the election in November, during the lame duck session of Congress. We don’t want to be saddled with more burden for their spending. Based on those projected budget deficits, a sluggish economy, and the we’ll-grow-our-way-out rationale, they clearly understand the need to rack up more receipts.
But about those assurances. Couldn’t we conceivably tie the transaction tax immediately to the elimination of personal income tax. If that would be unrealistic with the budget nightmare, we could turn 2017 into 2013. Downward adjustments could be made to the estate tax (which they brilliantly boosted the top rate from 0% to 55%), capital gains taxes, dividend taxes, etc. How about slashing government by 25% to reflect the contraction of the private sector? Compromises are out there. But we’ll see if this is about compromise or a debt free America. I’d be getting into your local representatives ear about H.R. 4646. Tax reform is absolutely necessary, and this could be a step in the right direction. Or it could be more legalized extortion. Please start contacting your representatives about H.R. 4646, and pass this article to your friends and family.
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