APT: A Tiny, Flat Transaction Tax - Far Better for the Nation than the National Sales Tax

AUTOMATED PAYMENT TRANSACTION (APT) TAX Taxation technology for the 21st century

Dr. Edgar L. Feige, Professor Emeritus of Economics from the University of Wisconsin-Madison and the originator of the APT Tax concept, has just produced new estimates suggesting that a broad-based transaction tax as low as six tenths of one percent could replace the entire Federal and State 2005 budget revenue requirements of the United States of America.

The APT concept is elegant in its simplicity - potentially replacing the entire federal and state tax system - including income, corporate profits, excise and estate taxes - in favor of a tiny tax on all transactions. The tax would be automatically deducted from special taxpayer accounts, linked by software to all accounts at financial institutions capable of making final payments to the government seamlessly in real-time. The APT tax therefore eliminates the need for individuals and firms to file income and information tax returns. This is estimated to save citizens and the government roughly $200 billion per year in administration, enforcement, evasion and compliance costs, roughly seven times the amount currently being spent on homeland security.

The APT tax seeks to maximize the goals of both the government and the people - collecting necessary revenue with the lowest possible tax rate. The difference between the APT tax and our current income tax, as well as the proposed consumption taxes, is simplicity, progressivity, and breadth-the APT tax allows for significantly lower rates spread more equally throughout the world of economic activity. The APT is a transaction tax, and as such, taxes every single transaction that occurs in the economy including fund transfers between accounts and transactions involving the exchange of bonds, securities and foreign exchange. Because the wealthy conduct a disproportionate share of these financial transactions, the tax is highly progressive despite its flat rate. Progressivity is achieved through the skewness of tax base itself rather than through the progressive income tax rate structure of the current system. The very small tax is "sliced" off each side of every transaction as it moves electronically through banks and all other qualifying financial institutions. The tax collection is orderly and transparent, the rules are simple and universal and apolitical. The APT system eliminates the entire present tax code. No more exemptions, no more deductions, no more special interest loopholes and no more tax returns.

Feige's 2005 projections of total debits of $881 Tril., and total transactions of $832 Tril. (based on the most recent 2002 Bank for International Settlements data) update the figures he used in his original paper, published in Economic Policy in 2000. Taking the average of these two estimates ($856 Tril.), he conservatively assumes that the replacement of the current tax system with a revenue neutral APT tax will reduce total transactions by 50%. The projected potential APT tax base for 2005 would then be $428 Tril., permitting a revenue neutral flat tax of .57 percent on all transactions or .28 percent on each (buyer and seller) transactor to replace projected 2005 Federal and State tax revenues.

The tax rates required for a "revenue neutral" tax are divided into three phases which are the result of a suggested implementation plan that would gradually replace virtually all Federal and State taxes. The projected tax rates are calculated conservatively, assuming that only 50% of the potential 2005 APT tax base is available, since the volume of total transactions is expected to fall with the introduction of the APT tax. To the extent that transactions decline less than is assumed in the current calculations, an even lower tax rate would be able to raise the requisite revenues. As individuals and businesses use their new found economic freedom, transactions naturally grow over time, suggesting that future tax rates could be even lower.

Utilizing 50% of the projected APT tax base for 2005 of $856 Tril., that is, $428 Tril, the estimated tax rates required to raise the revenues projected for 2005 budgets are as follows:

Phase I (Eliminate all Federal taxes other than SS and Medicare) Required revenue neutral target=$1.242 Tril: Required tax rate = 0.29% per transaction or 0.15% per transactor.

Phase II (Eliminate all Federal taxes including Social Security and Medicare "payroll" taxes) Required revenue neutral target = $2.036 Tril. Required tax rate = 0.48 % per transaction or 0.24% per transactor.

Phase III (Eliminate all Federal taxes including Social Security and Medicare "payroll" taxes and all State personal income; corporate profits and sales taxes) Required revenue neutral target = $2.436 Tril. Required tax rate = 0.57% per transaction or 0.28% per transactor.

The estimates above are based on 2005 revenue and transaction projections. Implementing the three phases will require several years and careful government management, especially the third phase. However, Dr. Feige has built in a safeguard for the APT Tax by calculating the required tax rate based on only half of the transactions that are actually observed.

Examples: Assuming full implementation of Phase three: 1. $100 restaurant bill would have a tax to the customer estimated to be 28 cents and the restaurant would pay 28 cents. 2. $50,000 family income deposited and spent or moved to savings results in $100,000 of transactions paying a total tax of $280 distributed over all the individual transactions as they occurred through the year. These amounts would be doubled if businesses fully shifted their tax burden to the consumer, but nowhere near the $15,000 to $20,000 the family would pay under the current federal and state systems.

It is now important to begin the process of planning the economic, legal, technical and administrative requirements necessary for a smooth and transparent transition from the current tax system to an APT system. The proposed, new collection system will be tested by computer simulation to capture all potential errors and omissions (new job for the IRS). Then, it will take several years to rollout, especially Phase III involving central collection and distribution to the States. A national commitment to this revolutionary, fair, automatic and lowest cost tax system is needed NOW!

William J Hermann, Jr. MD, Director APT Tax Project Contact: administrator@apttax.com , 713-932-3773

Hello again -- bet your glad to hear from me again. I want to make several points on the stellar thread.

Regarding the famous "cascade effect". Every OEM manufacturer will experience the embedded tax reduction a la NRST of about 20% of the cost of each product. So when they are charged the 0.5% (both sides) back the saving will be 19.5% to the extent that the market will allow they will put that net in their collective back pockets. That's a savings cascade not a cost cascade.

I have not studied the turnover tax referred to but there must be considerable differences. Possibly the interactions (piling on) with other taxes may explain the failure. The fact is there are existing, successfully operating transaction tax systems functioning as add-ons today and every day in Brazil for example. They have their problems but according to a resident economist they are NOT related the the transaction tax with which they are pleased. A few other South American countries are having similar experiences.

Regarding the effect on the security and derivative markets.
The expansion of the tax base and shifting of burden substantially away from the critical engine of our economy the consumer will do nothing but spur business along with the tax and compliance savings business will experience. The revenue and earnings increases will expand the stock prices and your 401k plans NOT decimate them. True use of futures by people hedging production will continue but traders will be hurt. Floor traders and market makers are involved in internal transactions that would be protected from taxation.
When they remove funds to their personal or corporate accounts they will be taxed at 0.25%. The universal benefits that virtually everyone will realize under APT cannot hinge on a futures traders smile. Let the speculators move to other markets and experience their own versions of security taxes of which there are many. Further if they are looking for liquidity and volume they will be hard put to find it elsewhere. I can hear SAJ calling for my head already but that will be unrealistic, very loud, rhetoric. The major investments will flourish and there will be plenty of savings/investment capital to build new companies.

Now regarding NRST, I see five major problems:
1. It aims 100% at heart and engine of the economy with the potential for major price increases with wishing and hoping the market will force price reductions commensurate with tax and compliance cost savings.
2. It is the most regressive form of taxation even with the rebates.
3. It fully double taxes after-tax savings and accumulated, after-tax home equity that millions of Americans look to provide retirement source of funds for living.
4. The definition and compliance burden of differentiating used from new products is highly susceptable to evasion schemes and black market activity. Are taxed goods going to be "stamped" kinda like King George did awhile back which I believe we all found revolting?
5. There will remain a substantial collection and compliance bureaucracy, possibly moved to the state level, but they can be just as nasty or worst then the IRS especially when their ranks are expanded by Federal grants to states to provide these functions.

There -- that oughta spur another 400 posts. Could we keep them respectful and civil? -- probably not.

So when they are charged the 0.5% (both sides) back the saving will be 19.5% to the extent that the market will allow they will put that net in their collective back pockets. That's a savings cascade not a cost cascade.

Baloney, they are being taxed on their circular capital flows, that multiplies the effective rate as measured against sales revenues tremendously.

I have not studied the turnover tax referred to but there must be considerable differences.

Turnover taxes are applied to all corporate transactions, based on the full value of the transaction.

Possibly the interactions (piling on) with other taxes may explain the failure.

All it takes is the business passing the tax on to their customers via price of their product, as the must do to maintain profitability. The tax thus compounds as product is passed from business to business do the chain of production. It makes no difference the nature of the business, whether manufaturering or goods, service, finance or exchanges markets. A turnover tax is a turnover tax.

This is description of how a turnover tax works, there is no difference from your transaction tax, with the exception that your transaction tax taxes both sides of every single cash transfer which make it worse than the original forms.

More on the ubiquitous transaction tax (i.e. turnover tax; aka general sales tax)

http://old.ucipr.kiev.ua/english/ers/35/3507.html

Problems of and Prospects for Alternative Sales Tax in the Ukrainian Taxation System

By Valentyn Tregobchuk, doctor of economics, professor, head of the department for resource potential at the Economy Institute of the National Academy of Ukraine;

*** SNIP ***

From the theoretical viewpoint, the sales tax and the VAT are analogous, since they both are indirect taxes on consumption and represent different forms of the same tax collected at each stage of commodity production and turnover. The only difference between those taxes is tax article, to which tax rate is applied. In other words, the sales tax is levied on gross turnover and the VAT on net one. Though, in the practice of application of sales tax the above difference engenders numerous negative consequences the economic theory has not dealt with since early 20^th century, when their major drawbacks related to the nature of tax article became evident.

As the sales tax is levied on the whole sales value, inclusive of raw materials cost, should this tax be applied in the event of several production and turnover stages, it will generate a cumulative effect or that of sequential growth of tax burden. Proceeding from the above, tax burden depends on the “distance” from the manufacturer to the consumer. The higher is value, including wages and profit, added by a company operating at the initial production stage, the stronger is the cumulative effect. Hence, in this respect, the nature of tax burden is uneven and sporadic, for it depends not on the company’s performance but on its role in production chain and the number of technological cycles. Such an approach to taxation stimulates considerable increase of tax burden, first and foremost, that on consumer goods and food enterprises, processing branches of the agro-industrial complex, wood-processing, pulp and paper industries, machine building etc. It turns out that within the same branch, enterprises manufacturing products using high-grade and more expensive raw materials experience much more difficulties.

Such a situation engenders incentives to vertical integration, i.e. consolidation of technologically related enterprises, determining higher level of economy’s monopolization. Monopolies that emerged to optimize tax payments are not interested in cooperation with any intermediate parties, small and medium enterprises offer no incentives to competition. So, small and medium business declines, as companies cannot stand price competition with monopolies.

After the World War II, in the majority of states, the sales tax was not imposed due to the above reasons. However, further growth of fiscal needs urged a number of countries to seek for alternative types of indirect taxation. In 1954, France substituted the sales tax for the VAT and pioneered in change of consumer tax structure.

The expansion of the tax base and shifting of burden substantially away from the critical engine of our economy the consumer will do nothing but spur business along with the tax and compliance savings business will experience.

Making unsubstanitiated claims does not make for the fact that the transaction/turnover tax will do nothing but burden the economy down. It claims to be revenue neutral, that alone assures the it will burden the economy by 30%+ of GDP. That is inescapable, and is the clear evidence of the fact that it is a compounding tax, the other is the fact that it is based on full value of every transaction, cash flows are circular, capital is reaplied repetititively in the transfer of product throught the chain of production and the makets. All your transaction tax does is repeatedly tax that capital as it works in the economy, each time that capital is applied to its proper use. The tax is extracted from the transaction and must be compesated for by a higher price, on final product delivered. That compounds the tax burden.

When they remove funds to their personal or corporate accounts they will be taxed at 0.25%.

Each and every time for what ever purpose, profitibility requires volume flows & repeated utilization of capital in the generation of sales. Sorry the 0.25% compounds against the cost burdens on the company in their cash flow accounts, just like compound interest does in a loan. The more times it is applied against the principle (i.e. capital investment) the greater the burden on the principle, (1+rate)ⁿ-1 is the effective compount rate on your tax as it is applied against the aggregate capital (wealth) of the nation.

Now regarding NRST, I see five major problems:
1. It aims 100% at heart and engine of the economy with the potential for major price increases with wishing and hoping the market will force price reductions commensurate with tax and compliance cost savings.

All taxes hit at the heart and engine of the economy, the issue is keeping the overhead costs and deadweight loss that go with the fact of taxation to a minimum.

The NRST taxes once at the end of the entire chain of production, it is equivalent to a transaction/turnover tax with a value of n = 1 it cannot compound, it cannot repetitively add overhead cost to the system.

2. It is the most regressive form of taxation even with the rebates.

To illustrate examine the tax burden that a family of four will have at various annual expenditure levels as compared to that same family under the current tax law, (2004 income plus FICA/MC with EITC & child credits applied):

3. It fully double taxes after-tax savings and accumulated, after-tax home equity that millions of Americans look to provide retirement source of funds for living.

False, savings and investment are not taxed under the NRST. Neither the return on investement or saving, nor the capital when it is invested.

4. The definition and compliance burden of differentiating used from new products is highly susceptable to evasion schemes and black market activity.

All tax modes are equally susceptible to black markets, they occur regardless simply because of people desiring to escape oversight and reporting to government. (e.g. illegal trade, underground cash economy, barter, home grown instead of purchase)

Are taxed goods going to be "stamped" kinda like King George did awhile back which I believe we all found revolting?

Used means NRST previously paid. To purchase with paying the NRST requires certification and business license same as any retail tax that exists today. Businesses are auditable and their products tracibile by virtue of thier licensing. Any business of volume exposed to the monitoring of the state tax administrations, since more the 80% of dollar volume of retail trade occurs in less than 20%(the largest) businesses.

5. There will remain a substantial collection and compliance bureaucracy, possibly moved to the state level, but they can be just as nasty or worst then the IRS especially when their ranks are expanded by Federal grants to states to provide these functions.

LOL, there will be a substantial collection anc compliance bureaucracy with an tax system, especially you turnover tax.

The understatement of the year regarding the APT:

" Implementing the three phases will require several years and careful government management, especially the third phase. "

There -- that oughta spur another 400 posts. Could we keep them respectful and civil? -- probably not.

There will not be another 400post simply since this one has been more than covered.

Good day.

So again, I'm not seeing a difference between inflation and a transaction tax. Whether it's because of inflation or because of a tax, both are going to increase prices. So an increase in wages of .5% would negate or at least severely lessen this cascade just like an increase in wages of 2% would to an inflation rate of 2%.

Where is the wage increase going to come from?

Inflation is due to excessive expansion of the money supply, as the money flow into the economy goods are purchased at greater rates allowing the increase in prices, those additional sales revenues increase nominal profit (not percentage of profit), increase nominal returns to investors (not percentage rate of return), and accrues to increased wages as well. Net effect is not net real value gained. the primary nasty part of inflation is that bonds and retirment funds dependant upon them decrease in real value by not returning more for original dollars invested. Any dollar loaned looses value in an inflationary environment thus interest rates are increased to compensate both for current inflation and in anticipation of greater inflation to come.

That interest rate factor burdens the economy dragging productivity done as more dollars are turned to paying taxes, and non-productive factors such as paying loan interest instead of being turnaround to creating more and better products.

If anyone could explain the difference between having 2% inflation and a .5% transaction tax, and just having 2.5% inflation that would be very helpful.

The 2% filters into business and generally has less effect on production than a tax taken out of a business's productive capital flows.

That 0.5% tax by the way is not 0.5% on the price of product delivered, in the transaction tax situation.. That 0.5% transaction tax accumulates in every transaction the business is engaged in, even just moving money from one account to another incurrs that 0.5% tax. The consequence on final price of goods is a function of how many times that 0.5% tax has been applied against the basic capital value in the product's price. That is where the compounding effect of the turnover tax comes into play, the tax burden aggregates tax burden in the financial transactions of the business necessary to the performance of the conduct of the business' financing and movement of money to accomplish its goals.

The aggregate of that turnover tax taken from the business as a pecentage of its final sales revenue is much greate than 0.5% of price for products delivered to the consumer whom must finance the entire operation.

You may think you pay 0.5% with your small part in the deal, the reality is the othet 30% that government collects is done in final product prices. Those turnover taxes flow down the production chain accumulating all the way from the farmer in the field & his financial transactions, passing on to the miller and his financial transactions, passing on to the baker and his financial transactions, passing on to the wholesaler and his financial transactions, passing on to the grocery and thier financial transactions, and finally you get to pay again another 0.5% of the totall of all those taxes as well as the basic value of the products you buy.

The reality is that you are snookered into the belief you pay a low tax rate to the federal government, when the burden on you is actually a 100 times higher.

The piper always gets paid, the individual at the end of the production chaing always pays the full freight. Simply put, business cannot absorb the federal tax, it must pass those taxes along to the customer or go bankrupt.

That is what transactions really are, right? You are either paying someone or someone is paying you.

Basically you are correct, however what is not pointed out by the author of this APT sales pitch is that every financial transaction that business or individual may execute is going to induce the tax on both sides of every transaction (even when there is neither buyer nor seller involved).

Just moving capital from one account to another or trading one stock pr bond for another in fund & retirement portfolio management, moving dollars in and out of the country in response to maintaining balances, every thing is taxed on both sides of the transaction, both buyer an seller get hit. The more transactions involved in making creating the final result to be achieved the greater the tax bill.

GDP is the effective single count sum result of all transactions, it counts only dollars at the retail level as everything must of necessity accumulate to that end, intermediate tansactions at the distribution, marketing, wholesale, manufacturing, and raw materials production all sum to GDP, counting them separately is just multiple counting of the capital flow as as opposed to final product purchased by the individual.

The transactions being counted to compute the APT tax rate are all the circular movement of capital that are necessary to providing final product to the consumer. There are roughly 35*2 transactions (buy side & sell side taken together) more than the final retail transaction taxed under the APT, everything a business does involving the movement of its capital is taxed.

So a person would simply have to look at what they currently paid in federal taxes (call it "now"), and compare that to what they would have paid if the only federal tax was the APT tax (call it "APT". In this comparison, prices will be the same.

Net National ProductI\(NNP) is the number you need to look at for your effective tax base, it represents the spendable dollars you put into the economy (consumption and investment as taxed by the APT) that finances the entire ball of wax including what is paid to government. The percentage of tax revenues received by government vs NNP reflects the compounded effective rate of taxation that the American people finances.

That effective tax rate percentage for the APT is the Total Rate in the following chart, as APT must be implemented at all levels of government to work properly according to its author.

from Tax Freedom Day 2004 PDF http://www.taxfoundation.org/sr129.pdf

Total Effective Tax Rates by Level of Government Percent Net National Product(NNP)
Year	Federal	State	Total
1998	22.4%	10.4%	32.8%
1999	22.5%	10.4%	32.9%
2000	23.1%	10.4%	33.5%
2001	22.2%	10.5%	32.7%
2002 ¹	19.7%	10.2%	29.2%
2003 ²	18.5%	10.1%	28.6%
2004³	17.9%	10.0%	27.9%
Notes: Leap day is omitted to make dates comparable over time. Positive and negative percentages in parentheses after legislation indicate the first-year fiscal impact of the bill,measured as a percentage of NNP. Since depreciation is not available to pay taxes, GDP is an overstatement of spendable income for the purpose of measuring tax burdens. Depreciation is netted out of NNP. 1 Economic Growth and Tax Reform Reconciliation Act of 2001 2 The Job Creation and Worker Assistance Act of 2002 3 Job Growth and Tax Relief Reconciliation Act of 2003 Sources: Office of Management and Budget; Internal Revenue Service; Congressional Research Service; National Bureau of Economic Research; Treasury Department; and Tax Foundation calculations.

So we would need to see how everyone is affected by removing all federal taxes and putting in this APT tax. See above.

If I was offered the option of paying $5 to save $10, I'd take it. So it's a cost/savings issue that needs to be looked at on an individual level, rather than a definite rule that applies to everyone.

How do you accomplish the task of determining how much of the total federal (+ state & local) APT is embedded into the price of goods, services, and savings/investment dollars (and losses thereon do to extractions on capital by the APT) that you pay for.

No matter how you slice it, businesses do not pay taxes, they can only pass such on to individual's purchases of investment and consumption products. That my friend is the sum total of your paycheck that is getting whacked as you spend it, behind the camoflaging veil of prices, and lower income.

All the APT does is slice the pie into itty-bitty crumbs and taxes each crumb at is full capital value after it has the numerous individual components ingredients as they were involved transaction their multiple transactions, as well as the financial capital flows involved in business and venture capital financing required to create and maintain the manufacturing and service infra-structure.

The sum is the chart above, in regards to the tax alone that you finance under a revenue neutral tax system regardless of its overt design, it does not even begin to consider the effect of the compliance enforcement requirement will have on the costs of the businesses and transactions involved which when seen in aggregate are multiplied right along with that APT.

The APT operates much like the interest rate on a compound interest loan with no truth in lending law.

Truth in lending is there to assure the individual is appraised of the full effective simple rate he actually pays. Consider a loan in which interest is repetitively charged against the principle of the loan adding to the principal you owe under the control of the lender just moving his ledger from one desk drawer to another. That is what the APT does to the nation's capital assets and how a 0.5% compound rate of taxation becomes a 30%+ annual rate on capital dollars. That rate of taxation on capital dollars must be extracted from the final consumer of products, financial or goods & services. It makes no difference or the capital is totally wiped out in very short order.

Your 0.5% tax rate that you are allowed to perceive, becomes something much greater when you start looking at it through the lens of the economy and how it must operate. You see, there is no truth in taxing law to make sure you are aware of the real simple rate burden of the APT tax burden.

The APT tax taxes the seed corn my friend, out of sight hidden behind individual expenditure pricing. When the seed corn is eaten with out replacement from the final crop, guess what your family rapidly starves with declining harvests. The fruit of the economic harvest are consumer products you pay for. The seedcorn must be replenished from that crop.

Your screen name is well chosen.

APT encourages economic expansion

Sorry you tax a thing you get less of it not more, in this case less seed capital, and less venture and investment capial neccessary to maintain and grow the economic basis of the nation's economy.

by decreasing the tax burden on production, as well as consumption.

By increasing the tax on investment capital instead.

It taxes production, consumption and capital utilization. The more you tax a thing the less you will get of it. Guess what happens to a crop that has less seed to plant because it has been taxed away by the crows and rats.

APT encourages nothing but the growth of government at the expense of the economic infra-structure and ultimately the individual who finances the imperative requirement to replace the seed corn in his purchase of investment instuments, and consumption goods and service.

The APT weighs heaviest on the financial markets necessary, and bleeds production and incomes for personal expenditure that are the hallmark and basis of a capitalist society. This is a capitalist society yet, The APT is just a tool to assure the destruction of that society and convert it to a socialist paradise.

No thanks. Sell your tax system to france, maybe they have forgotten why they replaced their transaction/turnover taxes in favor of the other hidden tax system the VAT.

How conveniently you ignore the lessons from history regarding turnover taxes. Even in the space of a single thread(refer #324) you manage to ignore the reality of turnover tax experience.

Those who fail to learn from history receive the punishment of such neglect. In this case economic destruction:

Public Finance
Government Revenues and Expenditures in the United States Economy
http://garnet.acns.fsu.edu/~holcombe/

CHAPTER 12
Taxes on Economic Transactions
http://garnet.acns.fsu.edu/~holcombe/chap12.PDF

Page 235-236

Turnover Taxes:

A turnover tax is like a sales tax in that it is a tax paid as a fixed percentage of the value of a transaction, but a turnover tax taxes all transactions, not just retail sales. For example, if a leather tanner sells leather to a shoe manufacturer who then sells the finished shoe to a shoe store for retail sale, a sales tax will place a tax only on the retail transaction, whereas a turnover tax wilt tax every transaction. With a turnover tax, the tax is placed on the leather sold to the shoe manufacturer, on the shoe when it is sold to the retailer, and then on the retail transaction when the final user buys the shoe. The turnover tax is inefficient because it places a tax on the value of each transaction, thus discouraging transactions. The turnover tax taxes each good multiple times. In the shoe example, the retail price of the shoe includes the turnover tax paid by the leather tanner, the shoe manufacturer, and the retailer. Firms can avoid the multiple tax by merging and producing inputs themselves rather than buying them on the market. For example, the shoe manufacturer can buy the leather tannery and the shoe store, so that one firm tans the leather, makes the shoes, and sells them to the retail customer. This means that the turnover tax is paid only once rather than multiple times. A turnover tax encourages vertical integration of firms. When firms that buy and sell to one another merge, they eliminate some market transactions that would be subject to the turnover tax.

The turnover tax, while not common today, was used in Europe before the establishment of the Common Market, which was the precursor to today’s European Community. The replacement of turnover taxes by other types of taxes is a good example of how economic theory can be applied to improve the efficiency of the economy. The turnover tax is an inefficient method for raising revenue because it discourages potentially profitable exchanges and encourages potentially inefficient mergers. Turnover taxes, and other types of taxes, have been replaced in the European Community by the value added tax.

abit more:

http://www.britannica.com/eb/print?tocId=9108616&fullArticle=true

Multistage sales taxes, which are imposed at more than one level of production and distribution, without relief for taxes paid at previous stages, are sometimes called turnover taxes. For reasons of administration and simplicity such taxes are based on gross receipts; consequently, the taxable value at each stage includes amounts taxed at the previous stage (as well as the taxes already paid at previous stages). In order to avoid such pyramiding of taxes, an increasing number of governments employ a value-added tax. This is a modified sales tax based on the net value added at each stage rather than on gross receipts. Roughly speaking, an enterprise's net value added within a given period is equal to output minus input, calculated as its total sales minus expenditure on goods and services purchased from other enterprises. Tax liability is not, however, calculated by applying the tax rate to the value added figured in this way. Instead, receipts are used to show the amount of tax at each step; each seller adds the tax to the price and acknowledges this on his bill. Each enterprise's net tax liability is then calculated as the sum of all taxes it collects on goods it sells minus the sum of all the taxes it has paid on goods it has brought. This is sometimes known as the “invoice” or “credit” method of implementing a value-added tax.

John Quiggin - News Articles - GST9806
Australian Financial Review
4 June 1998

The VAT was introduced in France in 1954, to replace a system which relied a highly distortionary turnover tax on sales to supplement a rather ineffectual income tax system. The problem with a turnover tax is the 'cascade' effect arising from the fact that goods are taxed every time they change hands. The effective rate of tax on a good therefore depends on the length of the marketing chain from producer to final consumer. At even modest rates, cascade taxes are highly distorting. The VAT solves this problem elegantly, by allowing firms to credit the tax already paid on their inputs against the tax imposed on their sales. The net tax payable is therefore a fixed proportion of value-added.

Like the metric system, the VAT was adopted by other European countries, and the use of a VAT was made a condition of membership of the European Union. Once again, the English-speaking countries had less need to make the change, and were slower to do so. Their income tax systems were more effective, and their wholesale and retail sales taxes were less distorting than cascade taxes.

Incidentally, the Fair Tax proposal "buys votes" or public acceptance with its universal rebate feature.

For the Fair Tax Act, at a visible and announced cost to the entire electorate, 23% of total payment for goods and services to government, in clear juxtaposition with its benefits to them.

Who's vote is being bought, when both sides of the coin are visible and impact all?

Unlike the APT with it's pretense of not taxing the electorate at the cost of hidden embeddment of taxation into the very fabric of the economy.

Now that is buying votes.

Whatever tax reform proposal eventually gets adopted will be very effectively marketed to the public by a political class that survives on it's ability to do so.

Strange, the dominant marketing I see of the FairTax Act is coming from grass roots efforts via word of mouth and the originators of the legislation who happen to be small businessmen out of Houston Texas. The push has been on Congress to pick up on it by constituent pressure, not from Congress or the political class marketing anything to their constituents. Quite the contrary.

My experience has been the political class has either tried to ignore it on the part of most republican critters or in the case of the democrats actively seek to slander and misrepresent its features.

Fortunately, constituent demand is overcoming the hesitation of at least the more conservative elements of Congress as sponsorship of the legislation has grown from seven where it was stuck for for the first six years of its introductions to 54 in this latest session of Congress with its rapid growth of favor with the Republican leadership:

Here's a list of COSPONSORS! of HR25.

Ohh by the way, you never did tell us the bill number for your APT legislation, need to see your sponsorship and support, and a look at the details of actual implementation by Congress would be nice.

So far I have been unable to find a bill or even mention of the APT on the floors of Congress via the Congressional Record.

Afterall, anything can be said about something that has no reality in the form of supported legislation or implementation to look at out of historical perspective(luckily we do have the pre-WWII experiences with transaction taxes to fall back on(as in my examples above) in trying to understand the potential impact on our economy should a universal turnover tax, such as the APT tax, were to be put in place. Those certainly do not favor the adoption of your APT tax.

What I do find is interesting little tidbits in Abstracts on summaries (I'm too cheap to go out and buy the papers)

Transaction Taxes and Financial Market Equilibrium
"The author explores the effects of trade-size dependent transaction taxes on market liquidity and information acquisition. Transaction taxes cause strategic informed traders to scale back their aggregate trading, which, surprisingly, causes both market liquidity and informed investor profits to decline in the level of the tax. "

OOPs kind of a nasty side effect their if one is intrested in growing a retirement fund safely.

And as always, the Devil's in the details that Congress Critters put in making a bill palatable to create a supporting majority in Congress.

I know of only two additions to the basic NRST implemented in HR25(The Fair Tax Act), to make it politically palatable and enactible.

1) The Family Consumption Allowence in lieu of exempting specific goods and services or creating a bureacratic nightmare of credits or refunds to individuals based on income or wealth.
2) The particular language to actually fund the Social Securtity and Medicare trust funds instead of writing IOU's against future tax receipts.

The two together meet objections raised by politicians on both side of the isle to create sufficient support to introduce and grow in acceptance, that a substantive portion of that "political class" as well as the conservative constituency pushing it.

Now where is your bill, what are the actual features that make it supportable in Congress, and not an intellectual excercise of some academic fantasy looking for acclimation among their own rather than reality as expressed in legislative language supported in the halls of Congress.

All I've seen out of you folks is the clear declaration that the APT is going to require alot of government supervision of it and the economy to even come close to bringing it about. But then we all know the effects of government's attempts at supervision of economies, the results are rampant in Europe, and the now defunct USSR.

So where's the legislation, where's the political support, what is the cost to us in real legislation?

The proposed, new collection system will be tested by computer simulation to capture all potential errors and omissions (new job for the IRS).

Gee APT Project Director, looks like we don't even need to wait on a new and improved IRS to do that study. We already have them out of the experience of Australia and Brazil with their APT implementations.

Surely you as, Project Director, and all were informed of this study and its results based on implementations and use of the APT in Australia and Brazil. Why did lead us to believe there was no experience with this form of taxation?

Wasn't it nice of those wonderful countries to take the risk and find out what an APT really does for an economy?

An actual study of the APT, i.e. Bank Account Debit tax as it is otherwise known in its Australian (and CPMF) in its Brazilian implementations neither of which have had a good experience with it.

http://www.webmeets.com/files/papers/lacea/2002/176/BT111101.pdf

Disintermediation and Illiquidity in a Bank Account Debits Tax Model
P.H. Albuquerque
November 11, 2001

Abstract:

This paper uses a dynamic general equilibrium model to study the economic effects of bank account debits taxation. Theoretical aspects such as tax cascading, financial disintermediation, market illiquidity, impacts on divident and interest rates, tax revenue, government deficit, and effective rates on final transactions are considered. The Brazilian BAD tax,(CPMF) experience is evaluated. The imperical analysis shows that revenue productivity appears to be very sensitive to the tax rate, engendering a Laffer curve. It is also shown that may be impacts on real interest rates. Part of the BAD tax revenue can be lost due to increased intrest payments on government debt. Furthermore the deadweight losses seem to be significant if compared to revenue. Theory and evidence indicate that the BAD acronym is perhaps more than witticism.

1 Introduction.

Financial transaction taxes (FTTs) have always had supporters among influential economists, who believe they could be instrumental in the avoidence of macroeconomic instability. Keynes(1936), for example, had a clear stance in the matter. "It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of stock exchanges... The introduction of a substantial government transfer tax on all transactins might prove teh most serviceable reform available, with a view to mitigating the predominance of speculation ofer enterprise in the United States." Stiglitz(1989) and Summers and Summers(1989) further explored and asserted Keynes's views on securities taransaction taxes (STTs).

Anothe eminent proponet of an FTT was Tobin. He proposed a small tax on foreign exchange transaction, which is now known as the Tobin tax.¹ Eichengreen, Tobin and Wyplosz(1995), for example, argue that the Tobin tax expands national monetary policy autonomy and diminishes macroeconomic volatiltiy. Frankel(1996) is another defender of the Tobin tax.

Nevertheless authors such as Umlauf(1993), Hkkio(1994), Shome and Stotsky(1995), Jones and Seguin(1997), and Habermeir and Kirilenko argued or found evidens that FTTs not only ar unable to deliver the benefits thought out by their proponents but also can lead to undesired economic distortions.

Aside from this debate, there have been many signs in many countriesfor the introduction of an FTT specifically designed for

1 see Tobin(1978)

revenue collection: the bank account debits(BAD) tax.² Enthusiastic supporters defend the abolition of existing taxation systems which should be entirely substituted, in their views, by a single tax levied on all bank account debits.³ The supporters affirm that a tiny rate would generate all the revenue needed by the government, due to the large incidence base of the tax.

Despite the efforts of utopian compaigners, which a have been advocating BAD taxation for years, only f few recent academic studies have dealt with the subject. Some fo those studies are presented as tax reform proposaals, while others analyze the performance of theis tax in countries that have adopted it during the eighties and nineties.

Colabella and Coppinger(1999) and Feighe(2000) provide rationale for BAD taxation.⁴ Feige argues that it would be the most appropriate tax for economies based on electronic transactions. In his opinion, collection costs and tax evasion would be small when compared to traditional taxes. Collecton of taxes from illegal activities would be assured. Tax avoidance through barter or alternative currencies would not happen given costliness. Distortions woudl be small due to its low rate. Feige maintains that the BAD tax would fall disproprtionately on wealthier citizens and would eliminate wasteful tax-related activities, freeing a large amount of economic resources for nobler uses.

In contrast, Tanzi(2000) and Coelho, Ebrill and Summers(2001) reach different conclusion based on the experiences of Australia and som Latin-American countries that have adopted BAD taxation.⁵ As a rule, the BAD tax experiments failed in Latin America. The following negative consequences were common: financial disntermediation, incresd sise of the hidden-

2 The BAD acronym is comonplace in Australia, where this tax has been in place since 1983.
3 A representative grass-roots proposal is found at http://www.debittax.com
4 Feige calls it "automated payment transaction tax", or "APT tax".
5 In Australia, for many reasons, the BAD tax is considered inefficient. The Australian government plans to eliminate it by 2005. see Coelho, Ebrill and Summers(2001).

economy, a sharp and then a slow and constant reduction of financial transactions volume, disappointing revenues (generally smaller than1% of GDP) no matter the tax rate (which varied from 0.2 to 2.0% effective), shift of capital market transactions to New York, increased use of offshore banking, inefficient merging and vertiacal intergration, increased use of currency and bank account substitutes, and establishment of nonband clearinghouses.

According to Tanzi, if a BAD tax reduce the volume of financial transactions, then it will affect economic efficiency. Since the evidence for Latin America reveals reduction, he proposes that the BAD tax should be seen only as an emergency measure for countries facing a fiscal crisis. "If the bank taxes are used at low rates and only for priods of transition to better revenue sources, then, maybe, the deserv a less negativer reaction than most tax experts give them. However, they should not become permanent features fo tax systems."

Despite the rlevance of thaose studies, they did not analyze the impacts of BAD taxation using general equilibrium models. Thet also lack econometric analysis of available data. Both issues are addressed here. A simple but comprehensive dynamic general equilibrium model will be used to provide a theortical framework for the analysis of the BAD tax impacts on the economy. The model predictions will be tested using Brazilian data on BAD taxation, which are particularly suited to the task given that, in Brazil, the tax rated has cahnged a few times whil the incidence base definition remained constant throughtout the period.

Theoretical aspects such as tax cascading, financial disintermediation, market illiquidity, impacts on dividane and interest rates, tax revenue, government deficit, and effective rates on final transactions are considered, first theoretically and then empirically. Section 2 presents the model, while secton 3 develops the competitive equilibrium solution. Section 4 analyzes the steady state. The dynamics are considered in section 5. Section 6 presents

The empirical results for the Brazilian Bad tax (known in Brazil as CPMF). The paper ends with a summary of findings.

*** Snip ***

7 Conclusions

Australia's Prime Minister John Howard, once referring to a proposal of substituting all taxes in Australia by a BAD tax, declared: "It would completely rnder comatose a workable financial system in a very rapid period of time. And in a global world in which we now live we'd basically be saying that we're opting out oand going back to the jungle. I think, with great respect ot whoever is advocatin it ... it's a crazy idea."

The paper used a dybamic general equilibrium model to study the economic effects of bank account debits(BAD) taxes. Theoretical aspects such as tax cascading, financial disintermediation, market illiquidity, impacts on dividend and interest rates, tax revenue, government deficit, and effective rates on final transactions were considered.

BAD taxation levies on all other tax payments, on investments, on capital turnover and on bonds turnover. I cascades through production, penalizing specialization, diversification and competition. It unneciessarily benefits vertical integration. I punishes the small firm, which cannot concentrate transactino inside its boundaries.

An inspection fo the Eurler equations shows that it also majors real interest and dividend rates through two mechanisms. The first, common to other taxes, represents the effect of alower capital stock. The second effect, characteristic of this kind of tax, is associated with the increased capital and bonds turnover cost. This second effect will generally be substantial and much larger than the first effect.

The BAD tax has the peculiarity of levying on intermediation and liquidity. Since the use of bank services may be easil substituted or

24.

voluntarily reduced, the incidence base of this tax can be unususally sensitive to the tax rate.

The net return of an asset after discounting the BAD tax payments on asset transactions increases with BAD taxation. Capital and bond owners transfer their tax payments to renters(for example, companies, loan takers, and government) through higher rates of return.

The Brazilian BAD tax(CPMF) experience was evaluated. The empirical analysis showed that reven productivity is very sensitive to the tax rate, engendering a possible Laffer curve. It was also shown that theire might be impacts on real interest rates, particularly in the case of high-turnover loans. The CPMF is perhaps one of the explanations for the high interest rates and high spreads between bonds in Brazil.

Part of the CPMF revenue may be lost due to increased interest payments on government debt. This means that the difference between primary and operational deficits possibly increases with the CPMF. Furthermore, the deadweight losses semm to be high if compared to the relatively small revenues.

Theory and evidence, as exposed above, indicate therefore that the BAD acronym my be more than just a witticism.

25.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.