The Automated Payment Transaction Tax / Eliminate the IRS

http://www.apttax.com/index.htm ^ | Edgar L. Feige

[TopQuark]

Thank you for your kind words. It is good to see you, too.

So far, we know that income tax is bad, not many people are serious about replacing it with a sales tax,

I cannot put my finger on this one: I cannot comprehend what really opposition really is. One would think that the sales tax is both fair (taxes consumption rather than capital or its creation) and inexpensive in terms of collection. I have not really studies the issue, but with IRS being what it is and with the tax code exploding by the day, the support for the status quo is really puzzling (to me).

[szweig]

Where is it written in stone that the Gubmint gets a piece of everything you do? What entitles the gubmint to this largesse?

[TopQuark]

A transaction tax is not the same as the sales tax (the latter essentially taxes only what you consume). A movement of $10,000 from one IRA account into another is not a sale and does not result in consumption. It would entail, however, a tax under the proposed system.

[TopQuark]

Only an academic nut safely protected from the real world could propose such an ignorant scheme.

There is another category: really bad academics, whether isolated or not.

Your tax dollars at work!

Fortunately, this is not the case: the author is professor emeritus.

[TopQuark]

judging by the reactions on this board whenever ANY type of solution is introduced.

You probably have more experience in this area, but I have not seen such reactions to the sales tax, or even a flat income tax on FR.

But this particular proposal is truly stupid and, I am afraid, there is simply no other way to say that.

[arthurus]

The last paragraph just doesn't make sense.

[TopQuark]

The last paragraph just doesn't make sense.

That is possible. In this case the onus is on you to identify the deficiency.

Another possibility is, of course, that it does not make sense to you, which opens the question of whether you have any sense.

In the last paragraph of the aforementioned post I stated that the proposed tax contradicts the very basics of economics. If this is not clear, let me know, and I'll try to help.

[Murtyo]

my understanding of this kind of tax is that it would affect large financial institutions mostly. Currencies, Stocks, Bonds, Govt. Securities and Commodities are the classes of items that are traded most (in dollar terms). All of these classes of items benifit from being in highly liquid markets. This is where the burden of this tax would fall. Some times these trades make a very small percentage profit on a huge transaction. These trades are ways of balancing supply and demand on a global scale. Another problem is that these trading firms would just move offshore - a US Firm could have its overseas operation conduct all of these trades and repatratiate profits.
there are too many holes in this kind of Tax, the more I write about it the more I see them.

[SC Swamp Fox]

What entitles the gubmint to this largesse?

I don't think anyone has posted an opinion in favor of a large, intrusive gov't.

Whether we think they are entitled to it or not...the government is bloated and we currently have a "progressive" income tax system that acts to punish investment and achievement.

You don't think we should be discussing alternatives to our current method of financing our federal gov't?

[Principled]

Arghhh... at least tax reform is in the headlines...

[1Bit]

1] newgeezer - implied that APT would be a hidden tax. Not true. In fact, Dr. Feige describes how we would all have taxpayer accounts (TPAs) that would keep track of our gross tax payouts.

4] sharktrager - opposes the APT tax because he to assumes it "would be virtually invisible" and would make us all complacent and ignorant of how much we are really paying.

Nothing could make us as complacent as we are now by withholding income against our will. With an APT, we decide whether to pay taxes or not by choosing whether to spend or save. In addition to TPSs I mentioned above, I would expect everyone to become quit picky about that single little APT tax much the way the economy is to the Federal Reserve interest rate. Voters would be empowered the way it was intended.

10] TopQuark - First, he argues that the number of transactions don't increase with wealth. The amount of tax collected would be the same regardless of how many transactions you make. I don't know about you, but with income taxes gone, I think I'd go buy a few more things.

Second, he asserts that an APT tax would reduce market liquidity, inhibit the free movement of capital and labor and stagnate the economy. But the APT tax would be dwarfed by impact costs and broker fees. If anything it would cut a lot of short term speculative trading and reduce volatility.

Thirdly, he wrongly assumes that the author doesn't take into account the elasticity of the market. Dr. Feige's static model proposes a 0.3% tax rate while his elastic model assumes a drastic 50% drop in transactions which would require a tax rate of just 0.6%.

13] watchin - asks if cash would be an easy form of tax exemption. In the proposal, it is estimated that cash changes hands an average of four times before returning to a bank. With the APT tax, it might increase to about eight times. So banks would simply charge a 4x tax on all cash withrdrawls and deposits to account for those intermediate transactions and discourage the use of cash in general.

17] sharktrager - Also think people would ignore it like a state sales tax. (See 1 & 4 above) He also thinks that we would all end up paying more. (See 10 above)

22] You Dirty Rats - Thinks an APT tax would drive transactions offshore. However, the proposal suggests that property protection laws be restricted from offshore tax shelters and that any currency coming from such foreign institution be treated as counterfeit.

26] SedVictaCatoni - Uses the transaction tax that was implemented in Brazil as an example. But, transaction taxes were never intended to be used in small developing economies. Plus the Brazilian government simply added it on top of all existing taxes as a new source of revenue.

29] arthurus - Thinks Congress would raise the APT tax on impulse and diminish the initial returns of abolishing the income tax system. If the APT tax were ever adopted, we would all be well aware of a phenomena call cascading. Cascading is when a tax is applied to the same thing more than once through the chain of production. This would happen with APT but not enough to be a problem for anyone. However, increasing the initial tax rate even slightly would first nibble on business revenue and then cascade into a noticeable increase in the prices of finished products. The rate increase might increase short term revenue for Congress but only at the expense of long term transactions. Any short term gain in revenue wouldn't make up for the long term loss. Any Congress that adopts the APT would also want to anchor the initial rate with something like a constitutional amendment so that all future congresses would be forced to conserve spending and grow with the economy.

30] sharktrager - Also believes that any Congress who would adopt the APT tax would then raise the rate to the demise of the economy. (See 29) He also makes an attempt to describe cascading but doesn't quite get the math right. Allow me to reenact his example:

	Description	Amount	0.6% Tax	Tax Paid
1	Paycheck	+$1,000.00	0.3%	-$3.00
2	Deposit	-	-	-
3	ATM(Cash)	-$20.00	**1.2%	-$0.24
4	Target(Socks)	-$15.00	0.3%	-$0.05
		$1,035.00	0.039%	-$3.29

**(See 13 above)

The last couple of transactions were Target transactions so they don't count. With a 0.6% APT tax, you would only pay half (0.3%) on each transaction. First you get paid $1,000, presumable by check, and that's one transaction not two. You then withdraw $20 from the ATM, buy socks at Target ($15) and your ending balance would be $961.71. You executed $1,035 in taxable transactions and paid $3.29 in total taxes. Your average tax rate would actually be 0.329%- slightly more then 0.3%, not 3.6%! In fact, after spend the rest, your total tax rate would never exceed 0.6% (0.3% coming in then 0.3 again going out). It's that simple.

31] SAJ - Thinks that short term speculative traders are enormously valuable because they increase overall market liquidity. So, everyone would be adversely effected by the APT tax as it would increase trading costs enough to force a considerable fraction of those who practice day trading, arbitrage, conversions and reversals to pick up their marbles and go home.

However, he isn't taking into account the cumulative positive effect that the APT tax would have in reducing overall operating costs for everyone. The income tax burden alone is a greater factor of brokerage commissions and assorted floor and clearing charges than the APT tax would ever be. If they really wanted to preserve liquidity, they could reduce their fees and charges by the traders share of the APT tax and they would still come away with significantly increased overall revenue.

I totally agree with his argument about transfers of funds between accounts owned by the same entity. If I have a checking account, a savings account, a paypal account and a sharebuilder account, the money I move between these accounts don't constitute as transactions and shouldn't be subject to the APT tax. I think Congress would make sure that was part of the deal before passing it.

32] technomage - PING! The idea in general is great but not perfect. But, for every criticism, there is a reasonable solution that makes it better. After all is said and done, more will have been said than done.

33] mhx - Thinks that a flat income tax is the best tax reform. Fortunately, the reason why we don't have a flat income tax is because income isn't flat. At about 10%, we start putting poor families, disabled and retired people out on the streets while collecting little more than half of the current federal budget. Anything more, and we match the federal budget in the middle of a welfare crisis. That's why we have tax brackets instead which leads us back to our current predicament.

34] SAJ - Thinks that transaction-intensive businesses that operate on VERY small margins would suffer job losses, layoffs and offshore transfers as a result of the APT tax. Again, as he did in 31], he neglects to account for the net INCREASE in net margins as a result of income tax relief.

38] SedVictaCatoni - Describes how a Swiss Re transfer of $41 million into a bank account in Dallas for 24 hours would be subject to the APT tax. But it's not clear whether the transfer is between accounts owned by the same entity or constitutes an actual transaction between entities (See 31 above).

39] balrog666 & 40] boris - Both comment that the APT tax would somehow lead to an underground cash and barter economy. However, bartering is way too costly and inconvenient to be worth the aggravation and the proposal suggests a 4x cash withdraw/deposit tax to discourage the use of cash. But, seeing as people are more than willing to pay as much as 24.9% interest on credit card charges, $1.50 for foreign ATM withdraw fees and state sales taxes as high as 9% in Texas, I don't see why anyone would go out of their way just to avoid the APT tax... accept perhaps all the broke and homeless income tax attorneys.

48] ancient_geezer - Seems to like the fair tax. Unfortunately, the fair tax would add an 18% to 23% federal sales tax on top of all state sales taxes which would crush this economy. This tax base is only about 50% larger than the income tax base which is why the rate is about two thirds of the average income tax rate. It would also have to come with exemptions otherwise it would literally put low income families and retirees out on the street. That further restricts this tax base, increasing the rate and allowing for ongoing voter manipulation.

51] SC Swamp Fox - Says he would open a bar and operate entirely on cash. How long do you suppose that would last once all of his upstanding customers and employees get wind of all the cash he's hording in the back office? I'd bet he'd reconsider after less than a week, despite the tax.

54] SAJ - Thinks the APT is just a variant of the Tobin tax. In fact, I believe it is, but if his objections to the Tobin tax are as shortsighted as his objections to the APT tax, perhaps his exodus from the U.S. markets alone would help increase our GDP.

[ancient_geezer]

Hiding taxes in transactions out of the view of the electorate is like driving a car without brakes or speedometer.

Transaction taxes are a great formula for perpetually growing government. How does an electorate exercise "Eternal Vigilance" with government imposed horse blinders on?

If one must be taxed, one must be aware of how much they are being taxed. The cost of government must be perceived all as well as the largess demanded of government.

 

A Taxreform bump for you all.

If you would like to be added to this ping list let me know.

John Linder in the House & Saxby Chambliss Senate, offer a comprehensive bill to kill all income and payroll taxes outright, and provide a IRS free replacement in the form of a retail sales tax:

H.R.25, S.1493
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.

Refer for additional information: http://www.fairtax.org & http://www.salestax.org

[Poohbah]

A consumption tax, with the tax clearly denoted on the receipt in big numbers, is my preferred solution.

[ancient_geezer]

[48] ancient_geezer - Seems to like the fair tax. Unfortunately, the fair tax would add an 18% to 23% federal sales tax on top of all state sales taxes which would crush this economy. This tax base is only about 50% larger than the income tax base which is why the rate is about two thirds of the average income tax rate.

That is what any revenue neutral tax must impose inorder to provide the same revenue to the treasury.

That is true of your with the transaction tax as well as it must extract the same dollar amount from the economy as the NRST would and of necessity msut be passed on to the individual by casading throughout the economy in retail prices to the final consumer of all goods and services.

It would also have to come with exemptions otherwise it would literally put low income families and retirees out on the street. That further restricts this tax base, increasing the rate and allowing for ongoing voter manipulation.

Not true at all, as all retail tax on sales upto the povertyline of expenditure are covered by a monthly demogrant to all households removing any need to exempt anything.

All legal residents will receive a demogrant called the Family Consumption Allowence(FCA) equivalent to the FairTax paid on essential goods and services. The FCA will be paid in advance, in equal installments each month. The size of the monthly FCA will be determined by the government's Poverty Level for a particular family size, multiplied by the tax rate paid to all households regardless of income or actual expenditure.

Every year, the Department of Health and Human Services [HHS] determine the "poverty level" for each family size.

The 2001 "FairTax" Family Consumption Allowance Figures
Family Size	HHS Poverty Level	Annual FCA	Monthly FCA
One	$8,590	$1,976	$165
Two	$17,180	$3,951	$329
Three	$20,200	$4,646	$387
Four	$23,220	$5,341	$445
Five	$26,240	$6,035	$503
Six	$29,260	$6,730	$561
Seven	$32,280	$7,424	$619
Eight	$35,300	$8,119	$677

1) Federal Register: February 16, 2001, Pages 10695-10697).

[ The monthly FCA for each adult is .23 * (HSS poverty level for a single person)/12 to assure no marriage penalty due to the manner in which the poverty level is dependant on family size. The monthly FCA for each child is .23 * (the incremental increase of HSS poverty level for a family with one child over no child) ] A. Geezer

A family of four, for example, could spend $23,220 per year free of tax because they will have received over the course of the year rebates totaling $5,341. $5,341 is the amount of sales tax paid on $23,220 in expenditures. A family spending double the "poverty level" or $46,440 per year will effectively pay tax on only half of their spending and, therefore, have an effective tax rate of 11 ½ percent or half the FairTax rate.

The beauty of the FairTax is that you can control how much you pay in taxes. If you happen to save, invest or spend a portion on used [previously taxed] items, you can get your effective tax rate below 9%.

To illustrate examine the tax burden that a family of four will have at various annual expenditure levels as compared against the income/payroll tax that same family pays today:

[WhiteGuy]

An excellent approach.

I could suppoout this initiative.

Likewise I support the NRST.

The thing I like most about this approach is that it removes the need for some "rebate" to consumers to make up for the taxing of necessities.

Anything that eliminates the income tax and associated "withholding" taxes is a great idea.

[Old Professer]

3 years ago, I bought a 1996 Geo Prizm for my daughter's use. It had 141,000 miles on it and now has 210,000. 1 set spark plugs, 1 set wires, 2 sets of tires, 3 sets brakes (finally wised up and bought new pads from Toyota), 1 power steering hose and 20 oil/filter changes.

Depreciation=$1500.00, maintenance total=$600.00.

[Bigun]

If one must be taxed, one must be aware of how much they are being taxed. The cost of government must be perceived all as well as the largess demanded of government.

A M E N ! ! !

[newgeezer]

newgeezer - implied that APT would be a hidden tax. Not true.

But, it HAS to be true. Just the simple fact that it's such a "miniscule" tax implies it HAS to be a largely-hidden tax. The things we see on store shelves will have some large, HIDDEN amount of tax already built-in to their retail prices.

It sure looks to be little more than a twist on Europe's hidden Value Added Tax (VAT).

As someone else already said, I would much prefer a consumption tax, with the number plainly visible on the store receipt, rather than buried in a few thousand "tiny" painless transactions before it finally gets to the consumer.

Paying taxes should be painful. When they're hidden and painless, it's too easy for Congress to raise them without hearing any backlash.

[1Bit]

I see. You assume that all costs of production are factored into the prices of products and, since any taxes on production are costs, then all taxes on production are eventually passed on to consumers through increased prices. So we might as well just tax the consumer instead. Right?

Likewise, I can assume that all costs on wages are factored into consumer spending and, since any taxes on wages are costs, then all taxes on wages are eventually passed on to production through reduced consumer spending. So we might as well just tax the chain of production.

The point is that we are both right. Taxes are a cost against both production and consumption, no matter where you apply it, so both producers and consumers should bare a fair share of the tax. That's what the APT tax does.

Let's say we have a national federal sales tax. If Congress raised the tax rate and caused us all a lot of pain, what recorse would we have? Would we just not buy anything and let the whole economy collaps or should we get pissed and just go shoplifting? Voting wouldn't matter at that point.

[ancient_geezer]

so both producers and consumers should bare a fair share of the tax. That's what the APT tax does.

Hmmm, why should a producer, who contributes to the nation through his investment in wealth and energy towards the benefit of the nation be taxed?

Seems to me it makes more sense to portion taxes on the basis of benefit derived from the economy as measured by consumption rather taxing on the basis of one's investments into the nation's economy as measured by labor or investment and savings dollars.

Remember, that which is taxed tends to be inhibited. Taxing cashflow as the transaction tax would, inhibits the most fundamental basis of modern economies. That makes no sense economically nor, for that matter, morally.