14 Apr 2012

The 0-0-0-0.x Plan : Who will pay? Part 2

In yesterday's post, I gave a few more illustrations of what the introduction of a 0-0-0-0.x would mean for individuals. I showed that virtually all normal citizens would end up paying a remakably small amount of direct tax. Even if you try hard, if you earn €2000 a month and spend it all, and even if you use a separate credit card account and use cash a fair bit, you will be hard pushed to pay more than 1% in tax. And even if you have over a million euros stashed away, and try to live off the interest, you still won't be paying much.  Indeed, if you have a million euros and hide it under the mattress and don't spend anything, you won't pay anything at all in tax. That's just the way things are.

In addition, I argued that  the imposition of a financial transaction tax at (say) 0.3% would almost certainly kill off all speculation that didn't make at least 0.3% profit on each transaction. While it's difficult to have a clear idea of what this would entail, and my discussions with economists lead me to believe that noone has a good model that would allow them to predict how much transactions would drop for a given FTT rate, I remain very confident that replacing all the current tax system with a flat rate FTT is perfectly viable. Furthermore, I am very confident that the rate of the tax needed would be a lot lower than the rates that ordinary citizens are currently paying.

I think that this is the crux of the matter. And indeed, the main critique that I get from my close friends and family is that they think that the rate needed to replace the current tax system will not be well under 1% (as I claim), but rather a value that is likely to be higher than the amount we currently pay in income tax, VAT and the like.  I am told that if the speculation is killed off by the tax (a good thing by the way), there would not be enough transactions left to generate the necessary revenue without having to apply a rate that would be even worse than what we have now.

I don't agree. Here's why. Under the present system, if  you buy something like at television (for example), you will pay 19.6% VAT (if you are in France). Under the 0-0-0-0.x plan, you would only pay something like 0.15% (half of the 0.3% rate - since you are just the sender of the transaction). Not possible you say. It's too good to be true.

Well, think about this. The company that made the television set has made a large number of payments along the way. It has had to buy the components, buy or rent the factory that it uses to make the set, pay its workers, pay the electricity and water bills, pay money to repay any loans it has taken out. The distributor will have paid the transport costs, the costs of storing the goods in a warehouse, the cost of paying the employees in the shop where you bought the goods. And in the shop where you purchased the television, there will be payments for the cost of the premises, electricity, security costs and so forth. On top of all this there will be cost for advertising. This list, while far from exhaustive, shows that in addition to the  0.15% that you paid when you bought the television, there may well have been  hundreds of financial transactions that have been involved along the way, each of which will be subject to the FTT tax. So, how much would all that add up to?

My argument is that, even without speculation, the volume of financial transactions needed to make the economy work is way higher than you might think if you just gave the total sales value of goods subject to VAT.

Do we have any idea of what this ratio could be? Well, I think one good guide would be to take a companies accounts, and look at the total incoming and outgoing payments. These numbers normally correspond to its total revenue, and its total expenses. If you take the top 186 companies in the world (corresponding to those with an annual turnover of over $50 billion, and add up the numbers (which I have done), you get a total of $18.9 trillion dollars.  This is their money coming in. Let's assume that the same amount of money gets paid out, whether in expenses, or in dividends - they would all get taxed the same. That's around $37.8 trillion. Taxing that at around 0.1% would generate around $37.8 billion.

But of course, this is leaving out a huge part of the economy out of the loop. Each one of those companies will be making payments to other companies to provide services like cleaning, advertising, IT services, transport, catering etc. Add all those numbers together and you start to get some idea of the total levels of transactions associated with the real economy.

Of course, you could argue that it is a bad idea to add to the costs for industry, and that forcing them to pay an FTT could put them at a competitive disavantage. But don't forget that as well as abolishing corportation tax on company profits, I am also proposing to do away with the various charges associated with employing people - the social contributions that currently make companies reluctant to take on staff. How much do you think that the CEO of a company would be prepared to pay as an FTT on all revenue and expenses if it meant no employment charges?

Finally, the real point about the plan is that everything would be scrupulously fair. All companies would be faced with the same transaction costs. And yes, a company that could find ways of being more efficient by making fewer transactions would have a (small) competitive advantage. And good for them!

The vital point is that spreading the tax across the widest possible tax-base and allowing the basic tax rate to be much lower than it is currently, makes tax avoidance much less critical. Everyone will be paying tax without feeling it in a pretty painless way.

I really do think that it makes perfect sense.

1 comment:

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