27 Feb 2012

Making a Financial Transaction Tax work

Suppose that we succeed in introducing an FTT in exchange for the abolition of the existing taxes - income tax, VAT, corporation tax. How can we make sure that people use electronic payment methods, rather than using cash, for example?

Well, one method would simply be to phase out cash all together - but this might lead to resistance.  And even if one currency disappeared, other currencies could still be used.

Another option would be to make drawing out cash expensive - with a charge 2.5 times the rate for making the payment electronically.  But this may not be enough. I do believe that some people will do almost anything to cheat the government out of a bit of revenue - almost as a matter of principle.

So, here's the solution. Make it so that only electronically verified transactions are legally binding. This is actually the method used to impose the Stamp Duty charges on share transactions in the UK. Only changes of ownership that are matched by the appropriate payment are legally binding.

Why not do the same thing for all payments? Suppose you want to buy a second hand car from someone. Imagine what would happen if the sale is only valid if it goes through an authorized electronically monitored payment system - i.e. one on which the transaction tax is payed automatically. You could pay €5000 euros to someone in cash to buy their car, and they could even sign an agreement to say that you were now the owner. But this document would be worthless unless backed up by a transfer of money between the buyer and the sellers bank accounts.

The beauty of this solution is that not only means that you would be insane to try and pay for anything with anything other than an electronic transfer. It also means that black-market trading would simultaneously become extremely unpopular.

Neat, eh?

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