The Plan

Now that the Biden administration has passed the latest Covid Relief Bill (American Rescue Plan), there is going to need to be some way to pay for this and other increased spending to come.     

Although raising taxes on the wealthy and corporations can raise some revenue, the entire gap would be difficult to close in this manner.  There is already tremendous pushback.    There is another, relatively painless way to raise additional, significant amounts of revenue. 

Not an income tax, a sales tax, a wealth tax, or even a value added tax.  It is time to consider a financial transaction tax.  Not a transaction tax just on the sales of stocks and bonds as promoted by Bernie Sanders and Pete Buttigieg.  Instead a 1%  tax on “every” transaction as funds move from one account to another. It is easy to understand.  Just call it “The 1% Tax.”   A one percent tax on “every” financial transaction could potentially raise over a trillion dollars per year, replacing a third or more of the annual revenue currently collected by the federal government. 

In 2019, 4.4 trillion dollars was spent by the Federal government, amounting to 21% of our gross domestic product.   Over $3.5 trillion was collected as federal revenue.  The difference (about a trillion dollars) was the annual deficit that year.

If the U.S. gross domestic product (22 trillion dollars) was represented by a backyard pool with 22,000 gallons of water and taxes of 21% (represented by 4400 gallons) were drained out of the pool, you would really notice it.  It would significantly lower the amount of water in your pool.   That’s what happens when income taxes are deducted from your gross pay.  It is a very noticeable deduction.   It is very difficult to implement income tax increases to raise revenue.   It leads to extensive schemes of tax avoidance.   

Since the amount of money involved in financial transactions is significantly greater than gross domestic product, the totality of financial transactions would be better represented by a lake compared to a pool.  You would need only 1% out of that lake to raise over a trillion dollars per year.  The 1% tax would hardly be felt by individuals, however the resulting revenue enormous.

So much money would be raised from this tax that it would be possible to eliminate income taxes on the first $50,000 of income per household and still have most of the revenue left to cut the deficit.  This would avoid the argument that Joe Biden was raising taxes on those making less than $400,000.  By eliminating income tax on the first $50,000 of income per household, the result would be an “income tax cut” for everyone, just more impactful the lower your income level.  The amount of money raised by the 1% tax will dwarf the loss of revenue from the first $50,000 of income per household.

  Currently, 20 trillion dollars worth of financial transactions flow through the Federal Reserve each business day.  Since I’m not privy to exactly how this amount is calculated, I assume that the same money is counted multiple times as it moves across different accounts.  For example, it is counted once when it leaves an account and then counted again when it lands in another account.  In addition, the same money is counted each time it passes through the Federal Reserve when it leaves an account and deposits to the landing account. Therefore, I am estimating that there are at least 4 transactions with the same money (and no doubt that same money is moving through additional accounts as well).    Assuming that is the case, we need to divide the 20 trillion dollars by 4 leaving (at the most) 5 trillion dollars of transactions per business day actually available to be taxed the 1%.   If there are 250 business days per year in which the Federal Reserve is operating, that would amount to 1,250 trillion dollars per year.  1% of that is 12.5 trillion dollars.  That would be nearly four times what the government currently brings in each year.  It would be great if the 1% Tax raised this much revenue, however there is another major consideration.

     That second major consideration is that when you tax something, you get less of it.  If 1% of every unique transaction evaporated to the government every time it moved, the number of financial transactions would significantly decrease as the movement of money became very efficient to avoid the tax.  The consolidation of funds moving within and through companies would be greatly decreased in order to avoid evaporating 1% with each movement.  It is likely that the volume of financial transactions would eventually be reduced by 90% over time due to that reason.

    Instead of 12.5 trillion dollars each year, a conservative estimate is that 1.25 trillion dollars will flow to the government annually (90% reduction due to increased efficiency).  That is still a significant amount and would represent about a third of the revenue currently collected each year by the federal government. 

An example of how the efficiency would increase is to consider taking a flight from Atlanta to Seattle.  One could take a flight with three stops between Atlanta to Seattle.  If the ticket was cheaper making three stops, a person might do that to save money.  However, if it is cheaper to take a direct flight, of course that would be the way to go.   In the case of a financial transaction tax, the more direct the flow of money, the less tax will be paid.   The number of financial transactions will continue to reduce over time.   In this example, one still needs to get from Atlanta to Seattle.   Therefore, the “transaction” must still occur, that can’t be prevented. The 1% will still be collected.

    Another figure I came across was a study that the annual value of noncash payments through the Federal Reserve is about $100 trillion dollars per year.  I assume this is not counting the same money more than once.  That also equals about a trillion dollars of revenue collected per year at 1%.   

If one’s salary was $4000 per month, $40 would evaporate via this tax and $3960 would land in their bank account (less social security and other payroll tax).   Some or all of this paycheck would be spent on a mortgage payment, car payment, utilities, etc.  As the funds moved from account A to account B to pay one’s bills, the evaporation would occur when the funds depart account A.  If a mortgage is $1,000, your bank will receive $990.  The bank could absorb this tax, or they could charge it back to the payer.  When the bank paid its utility bills and other expenses, 1% of that amount would flow to the government.  

If you spent $100 at the grocery store, the store will receive $99.00 after 1% evaporates to the federal government.  They may charge the 1% on the front end to make up for it, or accept paying it themselves.    When the grocery store pays their light bill, the utility will receive the amount, less the evaporation of 1%.  As money recycles and is spent and received, every time money changes hands, the tax is applied over and over, but in very small amounts, and everyone pays it.  Since it is such a small amount and would be difficult to avoid the tax, the need for an IRS enforcement effort of this tax would be minimal. 

Corporations pay a relatively small portion of the total federal revenue collected.  Only about $200 billion annually.  Amazon and many other large, profitable corporations pay little or no income taxes.    If one considered Amazon’s annual revenue of about $400 billion per year, they would be paying a transaction tax on every dollar they turned around.  It would automatically be paid, evaporating to the Federal government, up to $4 billion a year at 1% of their gross revenue if they spent what they brought in. Corporations would pay much more of the federal revenue collected than they currently do.  This is because accountants would not be able to figure out ways to avoid the tax.  It is not an income tax.  A transaction would not be open to interpretation.

There will be some that will be against this tax because it is not progressive.  It is essentially a “flat” tax.  It is similar to a sales tax, but applying to everything. The beauty of the 1% tax is that the wealthy actually “will” pay more, not only because they make more, but also because they have more assets that result in financial transactions.  A wealthier person typically owns stock, bonds, real estate and luxury goods.  For example, the purchaser of a 10 million dollar property would pay $100,000 to the government via the 1% tax.  For the average person buying a $200,000 home, the 1% tax would be $2,000.  The result would be a much fairer system.  The wealthier would definitely be paying more.

To start off, the amount of the Financial Transaction Tax should be 1/10 of 1% or even 1/100 of 1%.  The purpose would be to get the system in place and confirm what it will bring in.  There are always unintended consequences whenever a new system is rolled out.  It is expected that Wall Street transactions will shift more toward long term trades rather than short term trades.  Not a bad thing.  Corporations may try to avoid the tax by moving to offshore banks.  This cannot be allowed.  If corporations are operating in the US, any movement of funds associated with a transaction in the U.S. must be subject to the 1% transaction tax.   Foreign companies would also pay the tax on any transaction that passed through our Federal Reserve.

 Over time, gradually increase the % of the Financial Transaction Tax (up to the maximum of 1%).    Shielding the first $50,000 per household from income taxes would go into effect once this tax is fully implemented.

There are other considerations such as how to handle cash transactions.  I suggest a voluntary reporting and payment of the tax on all cash transactions over $500. (Payment of 5 dollars in this case, via a pre-addressed envelope available at the post office — and would be a patriotic duty.)

The 1% Tax …. a relatively painless tax for the vast majority while at the same time raising a tremendous amount of revenue.  President Biden — this could be part of your legacy.  Not only creating jobs via targeted spending on infrastructure and renewable energy industries, but paying for it too.

Joanne Tubo

Small Business Owner