H.R. 4646: The 1% Transaction Tax to “Phase Out” Federal Income Tax

Is the government serious about a substantial change in tax policy?

As we weather a financial crisis, sit on more than $13 trillion in public debt, and stare unsustainable entitlements in the face, it’s no secret that a resurgent movement for lower debt and smaller government has made its presence felt. There are a myriad of ideas out there on how to corral the debt. H.R. 4646, a 1% tax on all transactions using a payment instrument, is one such idea.

During the recession, the Obama administration has mostly focused on stimulating consumer spending and filling in the short-run hole of a contracting/flat economy with government spending. As their ten-year budget indicates, the Obama administration is betting on the American economy growing its way out of the substantial debt they’re prepared to tack on over the next few years:

Fiscal 2011 budgeted deficit: $1.56 trillion

Fiscal 2012 budgeted deficit: $1.27 trillion

Fiscal 2013 budgeted deficit: $727 billion

Fiscal 2014 budgeted deficit: $706 billion

Fiscal 2015 budgeted deficit: $752 billion

Fiscal 2016 budgeted deficit: $778 billion

Fiscal 2017 budgeted deficit: $778 billion

Fiscal 2018 budgeted deficit: $785 billion

Fiscal 2019 budgeted deficit: $908 billion

Fiscal 2020 budgeted deficit: $1.003 trillion

Total Ten-Year Budgeted Deficit: $9.267 trillion

Considering we already have more than $13 trillion of public debt, that is a lot of growth to be betting on — interest payments on the debt are more than $300 billion as it is. And that’s assuming the budget projections are accurate, which they rarely are. We all know the government can’t continue to spend at this rate.

Meanwhile others suggest that perhaps consumption, by individuals and government, isn’t exactly the path to economic growth; that actually savings, investment, and production are key if we’re serious about growth and tackling the underemployment problem. How can we argue there isn’t enough consumer spending when Americans spend virtually every dollar they make? The economic model driven on 70% consumption is obviously flawed. As individuals and businesses have tried to de-leverage themselves and boost savings during the recession, the US savings rates is up to 7 cents on every dollar of disposable income. That, for Americans, is impressive, but hardly when compared to China. The Chinese have managed to save around 30-50% of their disposable income since the 90s. Excessive? Yes, the Chinese have a real paradox of thrift on their hands. But those savings have put them in a position to invest and grow their economy. And it is presumably easier for individuals to transition from low or no debt and massive savings to increased consumption, than it is from high debt and low or no savings to, well, wherever Americans are trying to go.

In addition to growing our way out of the deficit, the Obama administration will explore ways to increase tax revenues, while continuing to monetize debt. Enter the debate on whether to extend the Bush tax cuts for select groups, a topic which deserves its own article. Taxes of any kind take away from savings, capital formation, and investment. And where does money for consuming come from? Jobs, rising incomes, and savings. With underemployment, cut compensation, net worth 50-75% what it was, and virtually no savings, how can we consume the economy forward? And, by the way, what are we consuming? Generally products made abroad, increasing the trade deficit.

With anti-government sentiment out there, H.R. 4646 awaits a vote which would institute a 1% transaction tax, while dangling the carrot of phasing out the federal income tax by 2017. H.R. 4646 is coined The Debt Free America Act. Its stated purpose is to raise sufficient revenue from a fee on transactions to eliminate the national debt within seven years and phase out the individual income tax. The 1% fee would be imposed on transactions that use a payment instrument, including any check, cash, credit card, transfer of stock, bonds, or other financial instrument. Said fee would be offset by a corresponding nonrefundable income tax credit. Variations of the transaction tax have been floated which would soften the flat tax impact on the poor. The Treasury could exempt certain transactions on which lower-income people disproportionately rely or exempt all transactions below some threshold (say $500).

As a result of the transaction tax, every $1.00 you run through a personal checking account would be taxed at 2% (once going in and once going out). Considering at the end of Q2, households held $170 billion in checkable deposits and currency, $6,228.7 billion in time and savings deposits, and $1,109.5 billion in money market fund shares alone, it’s safe to say this could be quite a windfall for the government.

As SwiftEconomics readers know, I advocate a Fair Tax. I’d be open to a 1% transaction tax concept and anything that simplifies the current system, though call me skeptical that the federal income tax would get axed by 2017, if at all. I am to trust the government to make a substantial paradigm shift in taxation, one they have shown absolutely no inclination of in the past, while they impose this additional tax on me in the meantime? Seven years is an eternity. What assurances do we have? Certainly not history.

If our government is serious about a substantial change in tax policy, it’s time to get this discussion going. Loudly. The legislation will likely be voted on during elections, and politicians may try to pass it after the election in November, during the lame duck session of Congress. We don’t want to be saddled with more burden for their spending. Based on those projected budget deficits, a sluggish economy, and the we’ll-grow-our-way-out rationale, they clearly understand the need to rack up more receipts.

But about those assurances. Couldn’t we conceivably tie the transaction tax immediately to the elimination of personal income tax. If that would be unrealistic with the budget nightmare, we could turn 2017 into 2013. Downward adjustments could be made to the estate tax (which they brilliantly boosted the top rate from 0% to 55%), capital gains taxes, dividend taxes, etc. How about slashing government by 25% to reflect the contraction of the private sector? Compromises are out there. But we’ll see if this is about compromise or a debt free America. I’d be getting into your local representatives ear about H.R. 4646. Tax reform is absolutely necessary, and this could be a step in the right direction. Or it could be more legalized extortion. Please start contacting your representatives about H.R. 4646, and pass this article to your friends and family.

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9 Comments

  • Jim Myrtle


    “As we weather a financial crisis, sit on more than $13 trillion in public debt”

    Debt held by the public is a bit under $9 trillion.

    “With anti-government sentiment out there, H.R. 4646 awaits a vote which would institute a 1% transaction tax”

    What a perfectly silly idea.

    “while dangling the carrot of phasing out the federal income tax by 2017″

    Does that mean the bottom half of the earners in the country will give up their EITC and start paying taxes now?

    “Its stated purpose is to raise sufficient revenue from a fee on transactions to eliminate the national debt within seven years”

    LOL! Income tax receipts last year were $915 billion. Assuming you raise that much, plus $1.3 trillion ($9 trillion debt held by the public/ 7 years), you’d be pulling about 150% more out of the economy. I wonder if that might stifle growth? More likely, a giant, cash only, black market would spring up.

    “I’d be open to a 1% transaction tax concept and anything that simplifies the current system, though call me skeptical that the federal income tax would get axed by 2017″

    No kidding, we’d have both and the rates would rise.

  • Ron Paul says that compromising in favor of freedom is the way to go. Adopting one more proposal in favor of one more tax is not increasing freedom in any way. The inflation tax is already a substitute for a transaction tax. One more tax is one more tax. If we want smaller government why should I support one more newfangled tax?

  • Ross Wolf


    Considering the taxes this idea proposes on checking account transactions, why wouldn’t consumers opt to keep their cash under their mattress to pay transactions? Consequently that would deplete banks of funds they need to operate.

    “The 1% fee would be imposed on transactions that use a payment instrument, including any check, cash, credit card, transfer of stock, bonds, or other financial instrument.”“As a result of the transaction tax, every $1.00 you run through a personal checking account would be taxed at 2% (once going in and once going out). Considering at the end of Q2, households held $170 billion in check-able deposits and currency, $6,228.7 billion in time and savings deposits, and $1,109.5 billion in money market fund shares alone, it’s safe to say this could be quite a windfall for the government.”

  • Boston811


    A lot of people don’t have tax liability and pay no federal taxes. Seniors, disabled, etc.

    So, this bill would have them paying 1% of all transactions. Some people will pay more than they normally would pay.

    I am one of them. I don’t have enough taxable income to pay federal tax, so a 1% tax on all my financial transactions would be like adding me to the tax rolls.

    Are some people going to be exempt???

    • I’m not a tax expert and don’t give tax advice. But it appears that yes, it would be like adding you to the tax rolls. No one is exempted in the bill; only potential exclusions to types of transactions are listed (SEC. 4501.(e)).

      http://www.govtrack.us/congress/billtext.xpd?bill=h111-4646

      For individuals, a credit will be allowed against the tax imposed for the taxable year an amount equal to 1 percent of the taxpayer’s adjusted gross income. If you don’t pay federal taxes, federal tax credits really aren’t that useful haha.

  • Southern_Wolf


    This is an invasion of privacy, plain and simple, not that it is not already happening but now it’s bold and in your face. The Government has been watching every transaction for years. You say bull, well tell me how they know if you make a $5,000.00 and above transaction they know about it. Do you really think they have some sort of 5 thousand dollar trigger that flags only those transactions? The government is going to monitor – even put under scrutiny every transaction and eventually we will be a chash-less society, and that is what they (the government leaches) are going for. It will make tracking a lot easier. It will take time but as said “the wheels turn slow”. High Horsepower gets you there really fast, high Torque just keeps moving. Our government is torque, they don’t move fast but they are strong – because they have money backing them and because mankind is greedy and the politicians know this fact, because they are greedy and have money. America views money as power therefore to even Patriotic Americans the government is strong to them. The morality of America has taken a nose-dive, we have to be politically correct or face possible lose of jobs, lawsuits and even jail/prison time. Today illegal aliens are treated better than Americans that helped build this country. A one percent tax on all transactions will most likely wind up producing more revenue for the government than an income tax as long as corporations have to pay the tax too. I can live with it, guess I’ll have to until someone with money and a true sense of American Patriotism is elected into office. One that loves and upholds the American way of life. Someone that will bring jobs back to America. A man that knows how to help the little man build new industrial empires, like what GE once was before they moved everything to Mexico, China, India, amongst other places. Who benefits by sending work to other countries – the corporate leaders and only the corporate leaders. Yea, the prices are a bit cheaper but it doesn’t matter how cheap the items are if you don’t have a job and money to pay for the items. No, our government, corporations and their lobbyists’ aren’t bringing other countries standards up, they are bring our standards down. Any dummy can see that.

  • This is totally bogus! Please check facts before posting something that will never come to fruition. http://www.snopes.com/politics/taxes/debtfree.asp

  • Lisa


    Great so we have to pay income tax AND a 2% tax on any money transactions? Maybe RON PAUL and the government should first (1 )pay back all the money that was STOLEN from Social Security. (2) Then they could work on the expensive and ongoing money spent on KILLING PEOPLE in wars. (3) Stop the tax breaks and bring OUR jobs back that were STOLEN from us by the Feds. (4) Pass laws to Stop giving big bonuses o Corperate CEOs. (5) Stop paying our Senators and Representatives lifetime pension and benefits when they serve just one term. Stop pensions and medical insurance on ALL federal employees. Taxppayers have low paying or no jobs and no insurance. Why subsidize their insurance and benefits? (6) Stop or cut entirely the high salaries, health insurance, many paid holidays, and long paid vacation of our government workers. (7) Banish Special Interest Group Lobbyists (8) The government got us into this not the American taxpayers so let them take a 10 to 15% cut in salary. We get fired if we don’t do a good job. They destroyed the economy and are STILL working and WANTING US TO PAY FOR THEIR SELFISH, STUPID MISTAKES (8) Do not pay social security death benefits to any widows or children of aliens who only paid into the system fo0r less that 10 years. (9) Deport ALL aliens and confiscate their real properties (10) Stop the “anchor baby” programs. (11) Do not pay food stamps, free health insurance. welfare payments for more than two children born or adopted by two parents or for any alien parents’s children whatsoever. Additional children by either parent are exempt from welfare. (12) Pardon any non-violent prisoners in our State and Federal Prisons incarcerated for light-weight (like pot etc.) convictions (13) Stop wasting our tax money on the War on Drugs (14) Stop us from paying income tax, 2& bank transaction fees, chose either state, city, or taxes and have us pay ONLY one of those. Free up our money so we can spend and help get economy going with our new jobs sent back from India. (12) Pay Senators and Representatives only for HOURS WORKED no a lump sum. (13) Make every large corporation pay a 3% tranaction fee. (14) Raise the interest rates and have large penalitesfor for the corporations who took bail-out money. (15) Send back any foreighners working here on Visas (16) Send back the Foreign Exchange Students and free up more jobs for American. (17) Have the president and governors pay rent of the publically owned properties they live in for free. (18) Force people to vacation lony in the United States until the economy gets better. (19) Have it so online purchases from companies out of state can no longer be taxed. (20) Get our public schools back to sudents learning about all different subjects, doint free thinking. Return to daily Physical Ed, art, and music classes instead of drilling our kids to pass tests. I think this is a good start.

  • Rick


    Why doesn’t congress take no pay until all this insanity by the most worthless 535 quivering mounds of blubbler and flesh in human history get this fixed they did it they should pay for it. Part of the reason for the 2nd amendment allows the population to take up arms and take over the central government to put it back to doing as the Constitution requires. So, congress look out we are watching you. One if by land two if by sea. We have a congress of cowards that steal our money. I am a Vietnam Veteran and all my life the government has crapped on me and my brothers now it’s time for us to do some serious defacating!!!

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