THE SINGLE TAX ON BANK TRANSACTIONS
SINGLE TAX: CRITICISM AND REPLIES
In this section it will be shown that usual criticism of the Single Tax concept is mostly wrong, and often biased and unfair. Below, we summarize some of the most commonly heard allegations.
Regressiveness
The Single Tax’s structure is accused of not meeting the requirements for vertical equity. It was shown, though, that it is flexible enough to accommodate reasonable progressiveness, if so desired, by exempting operations that add to values below a given floor, during a given time period, or even by using progressive rate structures for different transaction value brackets. Though this possibility does not deserve our support, it could be easily implemented.
The distribution of Brazil’s tax burden by income groups reveals the extremely regressive nature of our present tax system. The supposedly progressive income tax only reaches the income of middle-class wage-earners in the formal sector, and fails to reach other income recipients, showing therefore a limited potential for income redistribution.97
The Single Tax, by using the filter of bank transactions, inexorably reaches all types of income. It is ultimately more equitable and more progressive than, for instance, Brazil’s tortuous income tax. As for indirect taxes embedded in prices, the Single Tax is not comparatively more regressive, and induces less allocative distortions than do conventional systems for taxing consumption, as shown in this text.
Cumulativeness
The Single Tax is indisputably a cumulative tax, incident on bank transactions at each successive stage of the economic process. But this in no way discredits it as a good tax. The non-cumulativeness requirement for good tax system is a mindless fetish. No tax is perfectly non-cumulative, except those found in theoretical constructs divorced from reality.
Value-added taxes would be impracticable if they did not contemplate, as they actually do wherever they are practiced, the most diverse types of exceptions, exemptions and special regimes, which give them appreciable degrees of cumulativeness.
Brazil has a plethora of cumulative taxes, of which, curiously, some are execrated, others tolerated, while others still are fully appreciated, such as the special tax regime for small firms. The Single Tax is not different from these on this aspect,
97 [SIQUEIRA et alii, 2003]; see also [KOTLIKOFF, 2005] p.A-18, where the author states that
“switching from taxing wage and capital income to taxing consumption can significantly improve economic efficiency and growth…it can make our tax system much more progressive and generationally equitable.”
but it does exhibit the notable advantages described above – it’s simple, cheap, gentle…
Furthermore, the well-known conclusions of the second-best theory, as well as those of modern optimal tax theory, demonstrate that one cannot state a priori that a cumulative tax is less efficient than non-cumulative taxes. It is most likely that, for a given amount of revenue, a cumulative tax, which requires a low rate, is preferable to a value-added tax with a high rate, as shown in this text.
Incentive to excessive vertical integration
The weight of the Single Tax in the composition of final prices is inversely proportional to the ratio of value-added relative to purchased value of inputs, at each stage of the production process. However, incentives to vertical integration resulting from this peculiarity may be less present in the Single Tax world than in the tax structure that exists today. Coeteris paribus, the incentive to vertically integrate is obviously present in a Single Tax system, but it is a marginal thrust compared to the heavy cumulative burden that exists nowadays. One need only see that the PIS/Cofins (a former turnover tax on gross sales) alone had a statutory rate of 3.65%, and an effective rate of 3.79%.98
The incentive for vertical integration in production is intensified as the turnover rate increases. If we consider the Single Tax system’s low marginal rate, it is improbable that this integration process would go beyond what can be predicted by reasons strictly related to economies of scale and other types of externalities.
Verticalization beyond what would be justified in a neutral economic environment implies costs, against which the tax savings would have to be compared.
Furthermore, our simulations show that distortions in relative prices caused by the Single Tax are lower than those present in the current system, as was shown before.99 Actually, the decision to vertically integrate hinges preponderantly on technological reasons, such as gains of specialization and scale, compared to which the weight of the Single Tax should not be very significant.
Discrimination against domestic production
Imported products reach the final consumer after a few, one or two, intermediate domestic transactions. Thus, critics say, the Single Tax on imported products is significantly lighter than the tax load carried by locally produced goods. It could be argued that either for imports or for domestic production the tax load is relatively light compared to present levels of taxation. On the other hand, if necessary, such differences in tax regime can be compensated by customs duties, and by application of countervailing taxes on imports, as provided under international laws that govern
98 [CINTRA and ZOTTMANN, 2002].
99 [ZOTTMANN, 1994] pp. 299-315; see also [CINTRA, 1994(b)] pp.203-245.
foreign trade.100 Tax exporting
It is true that it is easier to exempt taxes on exports under the value-added tax system than under the Single tax. But exempting exports it is also feasible under the Single Tax system, though it requires more elaborate procedures. Tax exonerations would have to be calculated by empirically monitoring production chains, or by using Leontief input-product matrices, and thereby offering exporters tax credits, rebates, returns, or equivalent subsidies – not too different than what is nowadays practiced elsewhere, as demonstrated in various empirical studies.101
It is false that the Single Tax has an inherent anti-export bias. What hurts exports is not the existence of the tax, but rather carelessness in exempting it for exports.
Cluttering tax harmony
If most countries, including our trading partners (except, most noticeably, the United States) adopt the VAT model, and tend to avoid taxing exports or practice other types of discriminatory policy instruments, such as outright subsidies, it makes sense to search for tax formulas generally accepted in the context of foreign trade regulation.
On the other hand, the supposition that the Single Tax would be so dissonant with tax practices around the world, when compared to our trading partners’ systems, as to hamper trade and political rapprochement within regional commercial blocks is unfounded. As we have seen, the Single Tax is similar to gross sales taxes found in many countries.
The obsession with tax harmonization, seen as homogenization of tax systems, is something of a myth. In truth, the tax systems of different countries are profoundly heterogeneous for traditional, cultural, political, economic, and geographical reasons, and this has not hindered the accelerated growth of international trade.
Stimulus for banking disintermediation
At a reasonable level of taxation, the tax savings obtained by avoiding the banking system, and thereby having to carry out business transactions in cash or barter, does not compensate for the resulting additional transaction costs such as cash storage and transportation, the lack of safety, the risks of counterfeits, the illegality
100 A bill presented by the author, in discussion in the Chamber of Deputies, PL nº 190/2001, creates a Tax equalization payment whose objective is to impose a tax on imported products equivalent to those levied on domestic production.
101The use of tax rebates to exonerate exports is a common practice in countries like France (detax for tourists), Argentina, and many others. In China their VAT is not credited, but rebated to exporters.
See [WHALLEY and WANG, 2007]. China “does not zero-rate its exports but rather permits fixed rates of export rebate on a presumptive basis, with different rates for different products” as shown by [BIRD and GENDRON, 2005] p. 96 . For Brazil, see [CINTRA, 1994(b)] pp.216-225.
of foreign currency transactions, etc. To this, we add measures such as surcharges for cash withdrawals and deposits and other dissuasive measures that have been mentioned throughout this text.
Social injustice
At least 30 million individuals in Brazil do not have bank accounts, despite being participants in the active labor force. They do not qualify for bank accounts – i.e., they are illiterate or lack stable income sources, permanent addresses, property, etc. In the Single Tax world, critics claim that these individuals would be harmed by surcharges or any other penalizing measure applied to cash transactions.
We rebut this objection along two lines. First, it is possible to universalize access to the use of electronic money through the use of debit cards, even if the use of checking accounts is subject to restrictions.102 Second, such people already suffer from a regressive tax system, with heavy fiscal overcharge, that would decrease under the Single Tax system. Because they have a strong propensity to consume, they are victims, under the current system, of an extremely high indirect tax burden imbedded in prices. This burden would certainly be reduced as the Single Tax replaces current consumption taxes.
Excessive indirect tax burden on consumer prices
Under the current consumption tax system, which is subject to exuberant evasion, substantial portions of the price paid by consumers are taxes that, in fact, are not collected by the government. To a great extent, they are appropriated by the tax evaders themselves. By replacing current taxes with the Single Tax, tax evasion would be eliminated and the tax burden, built into prices, would be more lightly distributed. The anticipated effect would be a fall in prices, which would benefit, first and foremost, the neediest segments of the population, who spend all their income in consumption goods.
Abandoning fiscal policy
The proposed Single Tax system is accused of giving up the use of tax instruments for economic policy making. In general, however, the use of tax instruments to achieve redistributive or greater social equity purposes does not achieve the goals desired by society and by policy makers.103
102 In an interesting article [THE ECONOMIST, 2006] the so-called “unbanked” or “under banked”
population in the US amounts to approximately 40 million people. They receive over $ 1 trillion a year from employers, government, insurers etc. Such families are now being transformed into a new pool of potential customers to banks, debit and pre-paid card companies and stored-value and other forms of multi-purpose cards. Such plastic money is being increasingly used throughout the world.
103 [SIQUEIRA et alii 2001] pp.513-544; [IMMERVOLL et alii, 2006 (a) and 2006(b)] pp. 203-223, where it can be read that “the redistributive effects of tax-benefit systems in developing and transitional countries are much less expressive than those observed in developed countries…the predominance of indirect taxes and the way the progressivity of the personal income tax interacts with the highly unequal income distribution renders the tax system a poor redistributive tool.”. (p.219)
The Single tax actually does away with the use of tax incentives, or disincentives, as instruments of economic policy. However, policies related to prices, income, as well as growth and anti-cyclical policies can still be carried out through the utilization of non-fiscal instruments such as monetary, credit, consumer relations regulations, and even direct subsidy policies and cash transfers. All of these instruments are more transparent and more subject to social controls than obscure tax benefits, which usually do not achieve the intended purposes of tax policy makers.
The loss of tax instruments does not immobilize economic policy; it only makes it less tortuous. Policy makers must adapt to a new paradigm of economic policy, one that does not count with tax instruments for intervening in production, consumption, and investment, but which can be both more powerful and more efficient than tax incentives.
It is not our intention to abolish tax instrument in customs policy and in regulating financial markets. In many countries taxes on foreign trade are administered as customs duties, and customs administration is usually separate from federal tax administration. Foreign trade duties would not be abolished.
Single tax base benefits property and wealth
The Single Tax unifies all income and consumption bases, but allows the property base to escape taxation. Critics say that property owners would escape taxation tax more easily than would those whose savings are concentrated in the financial market. They would also escape taxation by avoiding financial transactions through the use of barter trade.
We respond that, first, barter, or “in kind” type of trade is hardly a realistic alternative in the modern world. Furthermore, this type of economic relationship can easily be avoided by proper regulation. Also, property and wealth taxation have been showing a declining trend relative to other taxes in the world. Brazil has a certain aversion for this type of taxation due to it being costly to administer and unproductive in terms of revenue collection.
But surely the Single Tax model does not preclude its concomitant use, if desired.
Weakening the federative principle
Replacing municipal and state taxes with the Single Tax inevitably raises questions about weakening the Federation. The Single Tax could not work on sub national geographical bases because it would privilege areas that enjoy high concentration of banks. This excludes the possibility of transferring the Single Tax to state or municipal control. It can only be a federal tax, and the sharing of revenue must occur according to predominantly political criteria.
Under our proposal’s approach of gradual adoption, the Single Tax would initially be implemented only at the federal level. Later, states and municipalities could also be included in the Single Tax model, thus postponing to a later time the
difficult question of revenue sharing among them.
There are many models of federalism, with greater and lesser degrees of autonomy for decentralized political entities. From a strictly financial point of view, it seems that a constitutional guarantee of revenue sharing among the various federated entities, adhering to a negotiated proportionality system, would be sufficient to ensure federative autonomy. However, we cannot disregard that, according to a respectable current of jurists, the Brazilian federative model would be inseparable from the relative taxing autonomy of the federated entities, which means they must have their own taxing jurisdiction and authority, with the power to determine the variables that make up their own taxes and their respective administration.
It is not convenient to ignore the legal/political institutionalism anchored in our historical tradition. This is the reason we, when in doubt, may prefer the gradual path, with the introduction of the Single Tax in phases, beginning exclusively in the federal sphere and postponing facing the problems associated with the federative issue to when states and municipalities join in this tax model at a later point in time.104 This alternative abstains from suppressing state and municipal tax jurisdictions. The constitutional provisions will remain intact. Governors and legislators, both regional and local, responding to the demands of their respective populations, will decide whether to make full use of their tax jurisdictions and authority, or whether they prefer to abstain from using them, adhering to the federal Single Tax model.
104 In my Single Federal Tax proposal, states and municipalities retain their respective taxing powers, as the single tax model applies only to the federal government.