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ANOTHER ALTERNATIVE:

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

APT = hidden tax burden. It taxes capital cash flows in every transaction occuring in the economy.

This is what happens when the true tax burden is hidden from just half the voters of the United States:

It does not look very promising for the future
financial well-being of our offspring, does it?

TAXES

The APT hides the other half.

A government which robs Peter to pay Paul can always depend on the support of Paul.
-George Bernard Shaw

for

In general, the art of government consists in taking as much money as possible from one party of the citizens to give to the other.
-Voltaire (1764

It's like me in the restaurant: What do I care about extravagance if you're footing the bill? --- Walter Williams

The perfect formula for every growing government.

To remove perception of the tax burdens of the individual, is to remove the goad which assures accountability of government to the electorate. Federal tax rates are high and government grows ever larger because a majority of the electorate do not perceive proportionately the burden their demand for largesse imposes on the minority of citizens.

Liberty and freedom have a price, responsibility. If that price is avoided there are no brakes on the growth of government, the ultimate result is the end of freedom through creeping socialism.

If you want to completely destroy American business, then the APT is definitely the way to go.

Very interesting. What's the bill #? DO you have any links to the economic studies?

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

It always does somehow, doesn't it?

This nation has more than enough government management, we need to get rid of abit from my view of the matter, not create reasons for more of it.

"careful government management"

thanks for the laugh..cracks me up each and every time that I read it!

Stupid idea. I thought we trashed this one already.

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

Gee looks like we don't even need to wait on a new and improved IRS and taking the risk of that APT to do an economic study. We already have what is needed out of the experience of Australia and Brazil with their APT implementations.

Wonder why that Project Director's sales pitch lead us to believe there was no study and contemporary 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?

Here it is, an actual study of the APT, aka Bank Account Debits 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)

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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).

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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

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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

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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.

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