What are the evasion/avoidance rates for transaction taxes that have been implemented elsewhere & how does this compare with more traditional taxes?

Question

Alternatively, The introduction of Single Transaction Tax would help to curb out Tax Evasion & Black Money?

The Arthakranti (a NGO working on Economic Reform in India) suggests the proposal of Tax Reform.

In the proposal they suggest that All Taxes and Duties of Central ,State and Local body Government except customs or import duties which functions as International Trade Balancer should be withdrawn and replaced with single point Tax deductible at Source.

The full details & suggestions from the proposal are here:http://arthakranti.org/proposal 

Key Points from Proposal are here:-

Would such Tax System Work and stop Tax evasion?

Or since Tax is to be levied on Actual transaction, one can just Note Down (Kind of book keeping of Transactions between Two people) the Transaction between two people (the way it is done in Hawala) and settles the trade between Two people after certain fixed period of Time and pays much less Tax..

e.g. Let the rate of such Single Point Tax is 2% (as suggested by Arthakranti to be Low)

If 'A' pays Rs. 100 to 'B' And after some time (days), now 'B' pays Rs. 200 to 'A'

In these transactions if tax is paid after each transaction, the Government would receive total Rs. 6 (Rs. 2 + Rs. 4) in Tax.

But instead actually transaction money each time, if both A & B decides to just note down the amount of money they owe to other & amount they going to receive and decided they will clear their book after six months (Fixed Period agreed by both).

Then in this case after Fixed period only transaction that takes place is 'B' pays Rs. 100 to 'A' and in this case the tax paid to government is Rs. 2 (Rs. 4 in Tax is avoided)..

This system of Book Keeping Transaction can be easily extended from Two people who frequently transact with each other to any Large Scale using Blockchain technology to note down the transactions (without actually making any transactions) and transaction can be settled in such a way that minimum Tax is to be paid to Government. (The same way Akamai Technology deliver content to the user from Nearest Server).

Does this model for avoiding Tax would work?

More precisely, what are the evasion/avoidance rates for similar transaction taxes that have been implemented in other countries (if any country have implemented such tax)?

and

Compared to traditional taxes on income, consumption, profits or wealth, how will Single Transaction Tax will perform in respect to Tax Evasion or in curbing Black Money?

Also Does Flat Tax like this would be regressive in nature?

Answer 1

I would say this is very unlikely to be a good idea. Not only is this basically a sales tax (which is widely known to be one of the most regressive taxes), but given that you can't track cash transactions, it would mean that cash suddenly becomes enormously more valuable. If your entire tax system is based on this, it would mean that about 30-40% of each transaction is taken. This means cash transactions are basically discounted by 30-40%, which is a massive incentive to use cash.

Even by reducing the size of bills, and making cash transactions above a certain size, the trouble of using smaller bills will generally be well worth the 30%+ discount, and so will breaking the law whenever possible.

One interesting thing about this is that it will likely be less regressive than a normal sales tax because the only people who wouldn't be able to use cash would be companies and rich people making large transactions. However, it seems unlikely to be a desirable system.

Its also very strange you suggest keeping import duties, as that kind of protectionist taxing is among the most harmful kinds of tax.

Answer 2

Would such Tax System Work and stop Tax evasion?

I do not think there is any system that can completely stop tax evasion. Even good systems can merely reduce it.

This system could help to reduce tax evasion, because it creates additional point where government collects information that can be theoretically used by tax enforcement agencies during auditing.

For example, if A paid transaction tax on transaction for some service to B, this information can be used to check whether B is properly recording income for income tax since from the transaction tax government collects indirectly information about incomes of recipients of these transactions.

However, your posts mentions that cash transactions up to some limit are excluded. This could simply lead to people just substituting cash transactions for bank transactions which is inefficient and does not help to reduce tax evasion.

Moreover, the larger the total tax burden people face the more incentive they have for tax evasion, ceteris paribus, so there might be negative second order effects that should be considered.