‘Plastic Tax’ Could Help U.S. Credit Line
If we’re lucky, Eastern Europe won’t reconsider its push toward democracy after watching Congress, the President and his 2 Live Crew of Darman and Sununu do their rap wild thing around capital gains and deficit reduction.
Taxation is never pretty but, to paraphrase President Bush, read my text: We do need new taxes. But not the “round-up-the-usual revenue, inspector” taxes such as on income or beer and cigarettes. Or cutesy taxes such as slapping a surcharge on BMWs and Acuras. That’s more like manicuring the problem, not coming to grips with it.
We need taxes that can fairly balance social equity with the financial challenge of deficit reduction. We need taxes that are easy to collect and that promote the value of savings over the indulgences of consumption. We need taxes that remind us that there’s no such thing as a free lunch.
Far more than any other nation, America’s consumers have luxuriated in free and easy credit. Like that outfit? Put it on the Visa. That cake looks delicious . . . Do you take American Express? Credit and charge cards have become the currencies of convenience for this country’s middle and upper classes. A good credit rating is the passport to consumption. Credit is as good as cash. In some places, it’s even better.
According to the Nilson Report, the authoritative newsletter on the credit card business, bank card spending last year approached $243 billion. Oil and gas station card spending topped $25 billion. Retail card purchases approached $76 billion. The Sears Discover card generated more than $11 billion in spending and other kinds of credit cards accounted for an additional $10 billion. American Express cards worldwide accounted for more than $100 billion in spending with more than half of that in the United States.
That’s real money.
All told, roughly 13% of consumer transactions are done on credit (by contrast, 37.5% are cash and 45.5% are check). The percentage of credit transactions is rising.
“If you look at the charts of how consumer credit has risen over the last decade,” says former Undersecretary of the Treasury George Gould, “it’s a pretty awe-inspiring mountain. It looks like the slope of Mt. Everest.” Credit card debt rose to more than $180 billion in 1988 from $81.2 billion in 1980. Talk about deficits!
Credit is a good thing; too much of it isn’t. Should we slap on credit controls as we once had in the bad old days? Of course not. But why should credit get a free ride? It’s time we put a small--2%--transaction tax on credit and charge card purchases.
Former Fed Chairman William McChesney Martin once said that the role of the Fed was to take away the punch bowl just as the party was getting going. A tax doesn’t take away the punch bowl; it just dilutes it a little so that people don’t get quite as drunk with credit as they have been. The fact is, we are witnessing record numbers of personal bankruptcies. A tax on credit would not only raises billions in revenue, it could get people to think twice about how they purchase something.
But don’t think of this as a sales tax; it’s not. It’s a “sin tax” on credit. Pay with cash or check or debit card and this surcharge doesn’t apply. It’s pay as you go instead of “pay and I’ll owe.” Roughly 40% of cardholders pay their bills on time, says Elgie Holstein, director of the Bankcard Holders of America. That means 60% do not.
“I like the idea so long as you don’t make it too regressive,” Gould says. “It appeals to me on the basis that credit card borrowing is really rather a free-for-all. . . . I come very reluctantly to the conclusion that government has a role to play when self-discipline doesn’t work. This area needs some discipline.”
“It’s not a bad idea at all,” says Spencer Nilson, the publisher of the Nilson Report who has covered the field for over 20 years. “There probably wouldn’t be any more change than there was when the interest deductibility was eliminated. Some people said that would be a disaster, and it didn’t happen.”
The superb data processing infrastructures of the credit and charge card companies like the banks and American Express make collecting the tax easy--unlike the challenge of implementing a value-added tax. What’s more, since few poor people use American Express cards or rely on credit cards, this tax is not unduly regressive (Indeed, you could create an exemption for the first $1,000 of credit spending during a year). Moreover, a 2% tax is designed to nick people, not skewer them.
Needless to say, the credit and charge card folks are less than thrilled with this idea. “We think it would be regressive,” says Nancy Muller, vice president of public affairs for American Express Travel Related Services. “We think it would penalize lower- and middle-income Americans who rely on credit and charge cards to manage their cash flow; high-income consumers are more likely to have access to cash that would allow them to bypass the tax. This also penalizes the small-business owner who uses charge cards.”
“To defend a plastic tax is a complete misapprehension of the way credit issued in this country,” says Bankcard Holders of America’s Holstein, who argues that the cards are primarily vehicles of convenience. Convenience, yes. But the tax code shouldn’t be used to subsidize the convenience of the financially comfortable. Most economists and people who understand the dynamics of investment and capital formation insist that our tax policies ought to give savings preference over consumption. That and curbing the deficit are key to reducing the cost of capital.
“I think that taxes should be aimed more at cutting consumption,” says Gould, the former Treasury undersecretary. “Don’t raise marginal brackets, don’t tax my saving and investment money too hard--but tax me when I spend.”
A “plastic tax” represents a novel opportunity to raise significant revenue without picking the pockets of the poor; it’s easily monitored and, most important, it sends the signals Congress and the White House should be sending. The credit and charge cards are wonderful innovations that transformed spending patterns in this country and around the world. They’d be a little more wonderful if they helped narrow the deficit.
