September 27, 2023
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Reform tax system with transaction tax


Charlie Sibbald

By Charlie Sibbald

Tax reform is in the air again. As with the weather, it seems like everybody talks about tax reform and nobody does anything about it. Congressional leaders are discussing a big plan, as is the administration, and there is an expectation that this may be the year we finally pass comprehensive tax reform.

But what will be in that bill? What kind of tax reform will we get? Who will be the winners and the losers? And will we finally have a tax-and-spend regime that includes a surplus so we can begin to pay down the national debt? Our debt is fast approaching $20 trillion with annual interest payments near $300 billion, which represents about 7 percent of annual federal spending.

There will be many proposals discussed including the flat tax, the fair tax, a national sales tax, and a value-added tax. One of the more unusual proposals is to repeal and then replace the entire tax code. It won’t happen, but it would certainly make for some fascinating midnight congressional sessions as they try to figure out the “replace” part after all current income is repealed. Oh, to be a fly on that wall.

We probably won’t hear much about a transaction tax, but we should. Virtually all economists agree that the best tax regime is a system that provides sufficient income to fund the government’s operations with the lowest rate and the broadest base. The lower the rate and the broader the base, the better the tax. The logical extension of this would be to extend the tax base to include all economic transactions, not just those that are the net income result of a series of revenue transactions and expense transactions, otherwise known as an income tax. By broadening the base to include all transactions, the tax rate could be very low, on the order of 1 percent or less. One percent top-line or 35 percent bottom-line, which would you prefer?

A transaction tax would have many benefits. It also would have a few significant drawbacks, not the least of which would be the necessity of enacting it as a constitutional amendment instead of a typical legislative bill. Just because it’s hard, however, doesn’t mean it shouldn’t be done.

A proper transaction tax would be universal, uniform and ubiquitous, meaning it would have no exemptions, no deductions and no exclusions. It would be assessed on every transaction without discrimination regardless of the product or service being transacted, and regardless of the status of the parties. It would be assessed on all individuals, companies, churches, government agencies, military units, etc.

It would also replace all other federal forms of revenue, including income, excise, import and estate taxes and duties. It would repeal all federal Pigouvian taxes, or social engineering taxes, such as on alcohol and tobacco. With no deductions, exemptions or exclusions, there would be no lobbying for special tax considerations. The taxation side of the ledger should only be used to raise sufficient funds to run the government. Any social engineering should be done on the spending side of the ledger. Transparency is the enemy of corruption.

The transaction tax is pro-business since it’s perfectly predictable and impossible to hijack by special interests. It would provide our business community with a measure of certainty none of the other proposals can match. It would also be simple, and easy to implement. Since the vast majority of transactions are now digital, clearing software could be modified to process the tax, similar to local and state sales tax collection systems.

In the early years of our republic, federal sinecures were doled out under the spoils system, and few believed we would ever have a transparent, predictable civil service system. It took a hundred years, but we finally passed the Pendleton Act and went on to have one of the best civil service systems in the world.

It’s well past time to apply the same reasoning to taxation, and reform the tax system by implementing the transaction tax.

• Charlie Sibbald is an adjunct faculty member in the California Lutheran University School of Management.