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Wednesday, August 24, 2011

Saving the Economy 1-2-3


At the time of this writing -- well, let's face it, at any time anyone whines about government, taxes and debt-drowning economies spiraling out of control, the air suddenly gets clouded with smoke and fog rather than clear cut solutions. The year 2011 will no doubt go down in history as the Year of Fear, wherein every western country had to deal with severe economic panics. Once great civilizations such as Greece, Spain, Portugal, Italy and Japan have been rocked by economic chaos. The international community has been plagued by fear and speculation, climaxing in Standard & Poor's unthinkable downgrading of the United States' credit rating, due mainly to America's unacceptable handling of its national debt.

The downgrade was shocking. Unacceptable. But not, as it turns out, completely unavoidable. Because it turns out there's a way to solve all of our economic problems quickly. Permanently. And with no need to raise taxes at all. No cuts in services are required, either. In fact, if you do this right, medical and social services could actually increase without even breaking a sweat.

Of course, if you ask the dolts in Washington, D.C., they'll tell you it's impossible to balance the budget without cutting more and spending less. But I'm a branding guy. I have no political constituency to lose, so I can dare to be bold. And I'm here to tell you that it can all be solved as easily as one, two, three.

The first issue to accept is that the problem isn't taxes or what we spend. The real problem is the underground cash economy that avoids taxation. If you think that's a small number, think again. Search anywhere on the internet and you'll find that everything from minor labor to illegal arms deals to backyard marijuana sales are generally exchanges of under the table, untraceable cash transactions which are never taxed.

There are generally two reasons for cash transactions, depending if you're transacting legal or illegal business. In the illegal market, paying tax on drugs, contraband and the like is tantamount to a one-way ticket to prison. It's an admission that you actually did pay for something the government forbids. In the legal market, people do cash transactions to avoid taxation. After all, what the government doesn't know about, the government can't tax. And at any tax rate higher than a few points, all tax rates do is motivate people to find a way not to pay them. This is why the pudgy guy with the five o'clock shadow and green teeth at the car lot will sell you that used Chevy for $2500 plus sales tax -- or $2000 if it's all cash.

Lest you think the American Underground Economy is trivial in stature, let me state that the average internet search (where such things are discussed) puts the annual figure somewhere in the trillions of dollars every year. That's a trillions of bucks on which the government collects no revenue at all. Nothing. And it slips out of the public coffers every day for just one reason:

They're all cash or barter - untraceable - transactions.

But what would happen if we eliminated cash completely? What if everyone were given debit cards and little swipers they can attach to their smart phones (which by the way, is already in wide use out there)? Here's what would happen: Every single transaction would be tracked and reported. Who paid it. Who received it. And even if it didn't expose the people involved, the system could automatically tack on the appropriate tax before approving the transaction.

It's not as nutty as you think. Merchant Service Providers (MSP) already do that when they verify every single credit card transaction they process. This is just one more nano-second stop along the way. But here's the real kicker:

With far more revenue exposed to taxation, every single local, state and federal authority could actually lower its tax rate. And I mean really lower it. In fact, I'd recommend doing away with the entire tax structure in favor of a 1-2-3 plan:

One percent of each transaction goes to the local government.
One percent of each transaction goes to the state government.
One percent of each transaction goes to the federal government.

That's a total of 3% on any transaction anywhere in the United States, applied to any and all transactions, collected at the moment it's paid. Add the 3% on the underground economy's trillions to the 3% of the legitimate market's trillions, and to paraphrase the late Senator Everett Dirksen, pretty soon you're talking serious money. Crisis-solving money, with corporate and personal taxpayers alike rejoicing because the days of double digit tax brackets are gone. If I haven't lost you yet, consider this, too: Because everything is tracked, reported and paid in real time, there's no more need to file income tax returns. No more Internal Revenue Service. No more audits. Just pay as you go government. How cool is that? What's the worst that could happen - the illicit drug culture turns to the Euro for its commerce? Please.

Fairer taxation. Lower tax rates for you and me. Higher revenues for the government with less government bureaucracy. It just doesn't get any better for this.

Unless you're an income tax preparer. In that case, you'd best be dusting off that resumé.

2 Comments:

Blogger Nathan Schor said...

"3% broken down as above is simply a brilliant solution! Indeed it deserves the biggest compliment I can give an insight by leaving me scratching my head and thinking "Why didn't I think of that?".

2:16 PM  
Blogger Rob Frankel said...

Good article Rob, in Canada we have a model not entirely foreign to what you suggest, called the GST, or goods and service tax, just as you suggest, when it was initially implemented 20 years ago, it generated far more revenue than the federal government had thought possible, indeed so much that in the past decade it has been lowered from 7% to 5%.  Unfortunately, we still have the same demons to struggle with, that the US battles, those of underfunded national pension plans, soaring cost of medical care for an aging population, and a slowly growing economy tied inextricably to our recalcitrant neighbours to the south. That being said, I believe our biggest struggle is slave to a master you have long expounded, that is the branding of a nation whose GDP is globally known for its value and excellence, when you can take a product made anywhere in Canada or the USA,  send it off to another country e.g. Mexico, India, China for manufacture, and one of those countries are able to duplicate your skill set with apparent ease, then you haven't really defined your product in such a manner as to set it above others. Until our nations resolve that issue, China and India's economies will continue to be a threat to our own, if we take post war Germany as an example, they have built a towering economy since 1945, truly the envy of the whole EU.  The US is still the model for economic growth, but it needs to get back to its original raison d'etre.


David (posted by Rob on David's behalf)

4:14 PM  

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