Academic support

Bill Gates: "Tax consumption, not income"

Ever so slowly, the media and prominent people are starting to understand the benefits of a single consumption tax. The adjacent video is of Bill Gates where he suggests that a better way of raising taxable income is via a consumption tax, since "income can be complicated".

There are however some differences between what Bill Gates advocates and what the ASP proposes. We do not believe in a "progressive tax rate", i.e. one where the rate increases as consumption increases. We believe in a flat tax rate - that is applied equally without exception and without any deductions.

 

The [Debit Tax] reform will create winners and losers. The greatest beneficiaries will be those whose current level of taxes are considerably reduced, primarily wage and salary earners with modest financial asset portfolios. Those most likely to perceive themselves as losers are individuals and financial institutions closely associated with the business of exchanging property rights in financial assets and those who sell advice concerning legal circumventions of the current tax system.

Edgar Feige
Professor of Economics Emeritus

 

Professor Feige - Taxation for the 21st century

APT-taxAdjacent is an academic paper written by Professor Edgar Feige from the University of Wisconsin-Madison. The paper examines in detail what he calls an Automated Payment Transaction (APT) tax.

This APT tax is identical to what the ASP calls the Debit Tax, except for the following two points. With the APT tax:

  • The tax rate is halved and then applied to both payer and payee.
  • Cash withdrawls are taxed at a multiple of the tax rate.

This report is a must-read for any serious scholar of the Debit Tax. It not only details the costs and benefits of the system, but it also compares it to the current "income based" system that is implemented in most countries. The most relevant sections have been highlighted to allow for easy and selective reading.

Below are a few of extracts from the paper.

Taxation for the 21st Century

Obvious benefits

In its simplest form, the [Debit] tax consists of a flat tax levied on all transactions.
Disallowing exemptions and deductions, and assessing and collecting taxes automatically, eliminates the largest components of administration and compliance costs. There is no longer a need for individuals to file tax returns nor for firms to file information returns.
By eliminating all deductions, exemptions and implicit tax expenditures, the [Debit] tax replaces the complexity and opacity of the current system with comprehensibility and transparency.
The automated recording of all [Debit] tax payments by firms and individuals creates a degree of transparency and perceived fairness that induces greater tax compliance. Also, the tax has lower administrative and compliance cost.

Tax evasion

Tax evasion is a major cost of the present tax system.
Every tax can be avoided and evaded. The question is, at what cost? Since the [Debit] tax is collected through the payment mechanism, it can be avoided by engaging in barter transactions. Except in very rare circumstances, barter is so costly as to reduce this loophole to insignificant proportions.

Winners and losers

 The wealthy carry out a disproportionate share of total transactions and therefore bear a disproportionate burden of the tax despite its flat rate structure.
The [Debit] tax reform will create winners and losers. The greatest beneficiaries will be those whose current level of taxes are considerably reduced, primarily wage and salary earners with modest financial asset portfolios. Those most likely to perceive themselves as losers are individuals and financial institutions closely associated with the business of exchanging property rights in financial assets and those who sell advice concerning legal circumventions of the current tax system.

Affects on people

The reduction of average and marginal tax rates on current taxable income from more than 30 percent to approximately 0.3 percent drastically reduces the present tax incentive to substitute leisure for work.

Affects on companies

Under the [Debit] tax, firms have a tax incentive to reduce overall costs. Employees, whose marginal tax rates on wages and salaries are reduced from roughly 30 percent to 0.3 percent, have little incentive to over consume fringe benefits, choosing instead higher wages and salaries that can then be used to efficiently purchase health care and other retirement benefits.
Since the [Debit] tax eliminates depreciation regulations, and deductions, firms are free to select internal depreciation methods which best reflect the actual replacement costs of their capital stock, the most efficient methods of financing investment and the least costly factor compensation package, dictated by market rather than tax incentives.

Shares and investments

It will substantially reduce the profitability of presently untaxed short term trading that now characterizes the market for swaps and options.
It will however increase the costs of the speculative non-trade related currency portfolio shifts that have contributed to greater volatility in international financial markets.
The tax will primarily affect the massive amounts of "hot money" transactions seeking to profit from the arbitrage possibilities created by minute international differentials.
By increasing the cost of frequent trading of equity and debt instruments, the [Debit] tax provides incentives for financial analysts to direct their talents to the search for fundamental long term high yield investments rather than design short term trading programs.

Summary

The benefits are likely to exceed the costs by a substantial margin.

end of extracts

 

Attachments:
Download this file (Payment Tax - Prof Feige.pdf)Analysis of the Debit Tax726 kB