THE FALLACY OF A TRANSACTION TAX
June 23, 2005
The idea of taxing all financial transactions instead of income, profits or sales, sounds deceptively simple since the volume of transactions in the economy is many times greater than the gross domestic product (GDP). In theory, one could theoretically match current federal revenues with a very low tax rate, says Bruce Bartlett, a senior fellow with the National Center for Policy Analysis.
One advocate of a financial transactions tax is economist Edgar Feige:
- He 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 in financial transactions annually; by contrast, gross domestic product (GDP) is only about $12 trillion.
Bartlett, however, says:
- 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, says Bartlett.
Source: Bruce Bartlett, "The Fallacy of a Transaction Tax," National Center for Policy Analysis, June 22, 2005.
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