THE BLOG

Tax Foundation Doesn't Get It!

08/09/2011 06:13 pm ET | Updated Oct 09, 2011

Mr. Philip Dittmer's dismissive assertion that the transaction tax proposal is without merit and is not seriously being considered underscores his fundamental misunderstanding of the proposal. There is a growing consensus on Capitol Hill that a new approach is needed to enact meaningful tax reform that is simple, equitable, and efficient, which are similar to the characteristics for fundamental tax reform supported by the Tax Foundation.

In the Debt Free America Act, simplicity is achieved by diminishing the incentive for taxpayers to limit their tax liability due to the dramatically lower rate of the transaction tax. The low rate of taxation, along with the frequency of its application, would reduce the desire of the taxpayer to find savings by claiming tax exemptions. It may be particularly burdensome for a taxpayer to find significant savings for each transaction in which a one percent fee is assessed. Rather than unnecessarily expending limited resources on avoiding the tax, the taxpayer would be more willing to pay the assessed tax because it is so insignificant. Therefore, the need to utilize a tax exemption is eliminated and the simplicity of the revised tax code is kept intact.

The Debt Free America proposal achieves equity by applying the same rate of taxation to each person equally. Consumers who spend similarly will be similarly taxed. Given the low rate of taxation at the proposed one percent, there is little incentive for individuals to change their behavior simply because it is being levied on each transaction, thereby retaining the progressivity of the tax code. Individuals who earn more are usually conducting more transactions, and are therefore subjected to the transaction tax more frequently than lower-income individuals who are conducting less transactions.

Finally, the Debt Free American proposal is also ultimately more efficient than the current system of taxation, exhibiting significant advantages over sales and usury taxes. Sales and usury taxes, which are generally categorized as consumption taxes, are only added to transactions with the final consumer. The transaction fee, by contrast, could be levied on every transaction so that every owner of a good would contribute at a lower nominal rate. The fee would be technically easy to collect, levied on all transactions-- including those processed through the Federal Reserve Bank, and collected at the point of sale for every transaction.

The Debt Free America Act is unequivocally the only legislative proposal before Congress that would pay down the federal debt within a decade. Other proposed efforts at tax reform either take too long or don't go far enough to address the problem. The leading Republican proposal, which is embodied in the recently considered H.R. 2560, the Cut, Cap, and Balance Act of 2011, would eliminate the debt 80 years after enactment at the cost of ending the Medicare guarantee, losing 700,000 jobs in a fragile economy, and protecting special interest tax loopholes.

Instead of castigation and derision, now is the time for Congress to press ahead with "outside of the box" solutions that addresses the historically difficult policy problem of enacting a revenue-generating mechanism that is sufficient in scope, easily understood, and fairly applied. The Debt Free America Act represents a new way of looking at the problem of implementing tax policy that is economically feasible. The transaction tax proposal most closely achieves the criteria that are necessary in achieving effective and fundamental tax reform. The United States must do better to implement a tax structure commensurate with its financial prowess and capability. Federal policymakers have worked too long with narrowly constructed tax benefits and credits that do little to provide substantive change, allowing the further devolution of the tax code towards complete incomprehensibility. Congress cannot leave this legacy of complication and opacity to future generations.