PostHeaderIcon Excise Tax vs. Income Tax

I haven't thought this through nearly enough, as it only just popped into my head while reading a comment to a post about reforming the Federal Income Tax, so I decided to blog it so we can kick the idea around a bit. It just might be an elegant solution to funding a properly limited Federal government. A basic truth is that taxes are often more about control than revenue. To encourage behavior, governments subsidize it; to discourage something, they tax it. Punitively taxing income and savings is counterproductive to a free market economy; if anything we should be taxing consumption. This is why I have long been an advocate of the Fair Tax; but even that is convoluted and messy in its implementation.

I would like to do away with the IRS, or at least its interface with individual citizens in any way. How much income we have, how we earn it, and how we choose to spend it, is none of the Federal government's business. What if we were to fund it entirely with excise taxes instead of income taxes? What if banks and all other financial institutions that provided banking services, were charged a small excise fee as a percentage of every transaction on the debit side of their ledger, and permit them to pass that cost on to their customers as a transaction fee? That way, depositing earnings and other income from whatever source would not be taxed. Only the act of withdrawing funds, one way or another, to spend them for whatever purpose, would be effectively taxed. No exceptions or deductions would be necessary or desired.

It would be naturally progressive as the more one earns, the more one spends, and the more likely one will incur multiple hits, by moving money around between accounts for various purposes. Yet, even the poorest citizen will be able to consider himself a taxpayer, even if only during the cashing of his check at a check cashing service, which would need to pass on its own excise fees incurred by the transaction. l sort of like the idea that the professional gamblers, euphemistically refereed to as 'day traders,' 'commodity speculators,' et al, would be paying handsomely for their generally disruptive sport, whether they win or lose. :)

Given the velocity of money, I have no idea what the excise tax rate would need to be; but if we could get the Federal government back out of the entitlement business, and other areas they are not Constitutionally empowered to be involved in, I am sure 1% would be much more than needed to fund its legitimate affairs. It even occurs to me that the salaries, benefits, and office expenses for Congress and their staff, probably should be paid by their constituents, not Federal taxes. Universal suffrage is highly overrated, so I think a substantial poll tax could be collected to cover these expenses. The thought of that engenders all manner of pleasing thoughts in my mind. :)

I could go on, and certainly will; but it should be enjoyable to brainstorm the idea, so please join me… ◄Dave►

 

3 Responses to “Excise Tax vs. Income Tax”

  • daedalus says:

    First the progressive (or any progressive tax) favors the already rich. It slows down the rate of growth of “new rich” to the extent that they try to enjoy their newly created wealth. Thus preserving the financial playground of folks like Soros. The only way to bypass progressive taxes is to not cash in on ones improving wealth i.e. Bill Gates. Shares of Microsoft increased in value and his wealth multiplied many times over as long as he did not cash it in. There are many “negative feedback” items that slow the growth of individuals while offering little difficulty to the already arrived. Things like frivolous patent suits. A friend of mine was part owner of a small company which invented the idea of powering a mouse from its computer connection. A large company proceeded to use the invention without paying royalties. His company tried to deal with the large company for some payment for the use of the patent. He was told that no they wouldn’t pay and it was pointless to sue since the big company had a very large staff of lawyers capable of keeping the case in court for years making their attempt to benefit from their intellectual property uneconomical. The lawyers represented a tiny fraction of the large companies expense whilst the small company would have to spend a significant portion of their cash to pursue the case. Increasing regulations achieve a similar effect. Dodd Frank will hurt the smaller banks much more than their “too big to fail” neighbors. Expect to see more centralization of the banking business. A side effect will be the disappearance of neighborhood banks that typically better understand the needs of their neighborhood small businesses, further impeding the step up the ladder for the small business. My point is that there is often more to what the government does than is immediately apparent. There is more going on than simple economics, more the aspect of “crony capitalism” limiting competition from the newcomer. My own take on taxes is, as far as possible, make users pay. Beyond that make taxation voluntary (lotteries for example). I agree with you Dave in that your idea seems less intrusive than the income tax.

  • Troy says:

    Given the velocity of money, I have no idea what the excise tax rate would need to be; but if we could get the Federal government back out of the entitlement business, and other areas they are not Constitutionally empowered to be involved in, I am sure 1% would be much more than needed to fund its legitimate affairs. It even occurs to me that the salaries, benefits, and office expenses for Congress and their staff, probably should be paid by their constituents, not Federal taxes. Universal suffrage is highly overrated, so I think a substantial poll tax could be collected to cover these expenses. The thought of that engenders all manner of pleasing thoughts in my mind.

    If we could get the federal government out of those areas where it is not Constitutionally empowered, the tax problem would shrink to insignificance, regardless of the method employed. That said, for sure we should tax consumption rather than income, investment and saving. I still favor the Fair Tax but without the so-called “prebate”. Indeed, I am against any form of taxation that exempts some of us from paying. As it is today, only a few say “ouch” when taxes are increased when it should be everyone saying it.

    Troy

    • ◄Dave► says:

      Agreed. The problem with the Fair Tax is that it still involves the Federal government in a relationship with every form of retail business, and encourages black market efforts at tax avoidance, etc. This is a massive waste of resources, which could be eliminated by just dealing with the banks to accomplish the same thing. ◄Dave►

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