Democrats Warming Up to Tax Reform, But Still Clueless on How To

Democratic Leaders Call on President Bush to Address Tax Simplification Now

Washington, D.C. -- House Democratic Leader Nancy Pelosi released the following letter today from House Democratic leaders to President Bush on the need to act now on tax simplification. The President is meeting with his advisors today on the economy.
Text of the letter follows:

December 15, 2004
President George W. Bush
The White House
1600 Pennsylvania Avenue
Washington, D.C. 20500

Dear Mr. President,
As we approach a new session of Congress, Democrats and Republicans agree that we must reform the tax code now. Recent statements by Administration officials indicate that you may postpone the appointment of a tax reform advisory panel and may delay sending Congress a proposal until 2006. We are writing to encourage you to act now so that tax reform can move us toward a system that is more fair, less complex, and that adequately funds the budget without perennial deficits.

Democrats are committed to the following principles:

Fairness: Tax reform must not result in tax increases on middle-income families, and we must uphold our commitment to progressive taxation. Millions of middle-income Americans are paying more than their fair share as a result of an overly complicated, loophole-ridden tax code. This tax burden will only increase as more families are ensnared by the...Read More

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!

For more details, please visit www.apttax.com

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

a poster once wrote: "The fair tax proposal does nothing to address these problems. Until we grow the economy and cut spending to restore balance, it doesn't matter what tax scheme you use, or whether we tax at all. We are all responsible and accountable for the accumulating debt."

Above are the basic thoughts you will get from fair minded fellow conservatives over the issues of changing the tax structure. However I believe they miss the fundamental reason why some people want the fair tax. That reason being, expose the truth.

I support the fair tax on this main issue. I believe people should really know how much they pay in taxes. In today's world where your money gets transferred to your checking account and all you really get is a data sheet of "items" deducted, in the end all you care is your take home pay.

Would people REALLY support a welfare state IF an I.R.S. agent waited outside their workplace and asked for 30% of their paycheck in cash EACH AND EVERY FRIDAY?

In the end I just want people to be pissed off as to how much of their money is taken away from them. Flat tax? Sure, I’ll go along with that idea ONLY if it is truly a flat tax and NO other federal deductions are taken out AND people have to write a check for it. No more auto-deductions.{pipe dream, i know}

Only after the clueless masses see and feel the truth can we gain hope in changing the federal government to balance a simple check book.
How will the people understand what $7,590,816,853,867.26 in debt is all about until they realize that THEY are the ones that owe it.
Want to jump to the point and skip all this trouble? Send each and every american, every child-old person-handycapped-democrat-republican a bill for $25,721.17 . If everyone would just pay up today what they owe, this whole tax structure problem wouldn't REALLY be an issue.

And all of God's people said......... {grin}

Would people REALLY support a welfare state IF an I.R.S. agent waited outside their workplace and asked for 30% of their paycheck in cash EACH AND EVERY FRIDAY?

In the end I just want people to be pissed off as to how much of their money is taken away from them.

Precisely!!

Hiding taxation from the eyes of the individual citizen it deplorable. Playing the ostrich will not make it go away, trying to pass it on to the other guy will not make it go away, in fact experience has shown that such manner of taxation inevitably rises until it so burdens an economy that a nation is driven to stagnation.

Ostriches are well known for the ability to hide their heads in the sand when danger is in they area. Apparently it serves to make them look like a bush instead of a meal.

Unfortunately, that does not prevent their being sh't upon by the buzzards roosting on their back.

"As a matter of fact, what the income tax does — and this is the debate that I think we always try to get into in order to let you and him fight, see — and the people of this country are led down a path where the actual control of their resources, which in the end is the control over their will, is handed off to the government."

. . .

"The government then manipulates that will in order to destroy the freedom of our electoral system through the income tax structure, and we call the resulting slavery a free system."

"In point of fact, it is not as the founders understood, and the only way to restore real freedom is to give people back control over the income that they earn so that they won‘t, at the voting booth and in other phony issues, be subject to that manipulation."

- KEYES TRANSCRIPT (01/28/02)

The Payment Transaction Tax is hardly new, just a warmed over version, with high tech flourishes and the serial numbers filed off, of the old European turnover taxes. The APT just taxes the same thing more times to drop the per turnover tax rate.

Google Search: Turnover tax & VATs and we find little Information about taxes on the gross value of transactions, (i.e. turnover tax) and why Europe gave them up in favor of the other problematic tax, the VAT:

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.

A little history on the turnover 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.

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.

Actually the APT is worse than a VAT by orders of magnitude, it taxes all purchases by business out of capital repeatedly as it compounds exponentially through out an economy with disasterous results. Unlike a VAT there is no credit or deduction from input purchases applied. Such turnover taxes bring business to a total halt, in fact the VAT was designed and implemented in France to replace the pre-WWII turnover taxes that had brought their economy to a standstill to correct the problems they were having. Kinda like replacing a sand & grit with mud as a lubricant LOL.

Here are some actual study results relating to variants of the APT, e.g. Bank Account Debit(BAD) 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
By P.H. Albuquerque 2001

That which you tax you will have less of:

"Note that the BAD[Bank Account Debit, e.g. APT] tax is equivalent to a consumption tax, and income tax, an investment tax, a tax payment tax, and a capital turnover tax."
P.H. Albuquerque 2001

From the APT website:

In the words of:

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 render 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 and going back to the jungle. I think, with great respect ot whoever is advocating it ... it's a crazy idea."
P.H. Albuquerque 2001

Empirical evidence and theoretical underpinnings of the failure of APT type taxes in numerous countries in history as well as current era suggest strongly the best that can be said for an APT on an experiential basis is what was indicated by Tanzi as a result of empirical evaluation of Latin American versions of the APT:

The following empirical data suggests a 0.25% APT tax on banking & finance yields ~1% of GDP tax revenues. By extension a full APT would cover an incidence base of approximately 4 times banking transactions, good for approximately 4% of GDP in tax revenue production.

The current federal tax system likely yields more than 5 times the level of a universal APT:

Tanzi, V.(2000). "Taxation in Latin America in the Last Decade." Center for Reasearch on Economic Development and Policy Reform Working Paper Series, 76. Stanford: Stanford University.

Page 31:

Financial Transactions or Bank Debit Taxes

Another, less attractive innovation is the tax on bank debit. As Table 11 shows this tax is now in existence in Brazil, Colombia, Ecuador, and Venezuela. In earlier years it was also used in Argentina and Peru and last year it was considered in Mexico which eventually decided against its introduction. In Colombia the tax was introduced to make up for revenues lost by lowering the value-added tax rate. In Ecuador it replaced income taxes. When this tax was introduced in Argentina and Peru in the early 1990s the results were not good. The initial revenue contribution quickly eroded and other problems appeared.

In its more recent versions the tax seems to have generated less difficulties, at least in the short run, and more revenue than in earlier years and the tax has acquired some strong supporters. There is very little popular opposition to it, it is relatively easy to administer, and it generates significant revenue. If it is applied at a very low rate, it may conform with a kind of "honey bee" approach to taxation whereby each collection is so small that it does not elicit a response on the part of the taxpayer. However, at higher rates and especially over a longer time frame this tax would likely have higher costs.

The bank debit tax is essentially an excise imposed on a specific activity, namely the use of bank checks. If the tax rate is small and the elasticity of demand for bank checks is low, the tax may not generate attempts at avoidance. However, if the rate becomes higher, individuals may realize that there are ways of avoiding this tax. Use of cash instead of checks would be one such way. Use of dollars would be another. Arranging to make payments through foreign accounts would be still another. Use of barter would be a further one. If the tax leads to a reduction in financial transactions, it would inevitably affect the efficiency of the economy. However, it is fair to state that almost all taxes have costs. Therefore, the choice must be made among second or even third best options. If the bank debit taxes are used at low rates and only for periods of transition to better revenue sources, then, maybe, they deserve a less negative reaction than most tax experts would give them. However, they should not become permanent features of tax systems.

Table 11. Gross Revenue from Bank Debit Taxes

                Tax        In Percent of   In Percent of
          Year  Rate       GDP             Tax Revenue       Productivity 1/

Countries where tax is being enforced:
Brazil    1994  0.25       1.06            3.6               4.24
          1997  0.20       0.80            2.8               4.00
          1998  0.20       0.90            3.0               4.50
          1999  0.22 2/    0.79            2.6               3.61

Colombia  1999  0.20       0.77            4.3               3.85
Ecuador   1999  1.00       3.50           26.7               3.50 3/

Countries where tax was discontinued:
Argentina 1989  0.70       0.66            4.3               0.94
          1990  0.30       0.30            2.0               0.99
          1991  1.05 2/    0.91            5.4               0.86
          1992  0.60 2/    0.29            1.5               0.97 4/
Peru      1990  1.41 2/    0.59            6.4               0.42
          1991  0.81 2/    0.46            5.0               0.57
Venezuela 1994  0.75       1.30            7.7               2.60 4/
          1999  0.50       0.60            4.9               1.80 4/

Somehow I do not see 4% of GDP sufficient for the revenue needs of this or any modern nation, especially as the nature of the tax is so hidden from the view of the electorate and has such an impact on an economy.

Byt its authors one admission an APT would halve the number of transactions occuring in the economy, which is death to liquidity and orderly exchange markets.

A comprehensive FR debate on the APT vs NRST:
http://www.freerepublic.com/focus/bloggers/1295188/posts

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