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Bush recently suggested that "looking at" the Fair Tax/National Sales Tax idea of replacing the income taxes with a 23% national sales tax (plus state sales taxes on top of that !?!).  Love to see him put into the Repub platform because it will play into the Two Americas theme perfectly (very regressive - puts poor workers into the 35-40% tax bracket, combining payroll and sales taxes) (discussed more fully by E.J. Dionne).  But don't get your hopes up.

However, it does bring up an issue for us.  We need to find a coherent approach to taxes and reform that gives us a chance to correct the Bush deficit nightmare AND address Social Security and Medicare underfunding AND wage and employment stagnation AND social necessities such as universal healthcare and quality education funding.  Although K/E have pragmatic positions and ideas for all of these in the short-term, they don't form a coherent approach for the medium and long term.  The Repugs will, once they're in the opposition again after Nov 2, have a field day trying to divide and conquer our agenda (diary) with the "how will it be paid for?" and "it doesn't add up" and "taxes are stifling our economy".   We can probably keep fighting this old fight for a while (with renewed vigor thanks to the appalling ineptitude of the Bushcons), but I think we have an opportunity to support an approach that will change the lines of class warfare permanently for the betterment of us all.

The idea I like is the Automated Payments Transaction tax (APT tax) which was proposed by a retired U of Wisc economics professor, Ed Feige.  His paper and a forum discussing the proposal are online.  Interestingly, this idea appeals to the economic libertarian conservatives and has recently been promoting on some right-wingish radio talk shows.  But, I believe it cuts very well for progressives as well and I'd prefer that we be in the discussion from the beginning.  Check it out and let me know what you think.  I summarize the idea and discuss its possible implementation and political implications in more depth below the fold.

The APT Tax is designed to potentially replace federal income taxes (individual and corporate), state income taxes, gift taxes, estate taxes, excise taxes, payroll taxes, fuel taxes, and sales taxes.  Property taxes could also be included, but the mechanics of those might get a bit tricky.

The APT Tax is simple in concept, efficient to collect, progressive in their economic impact, and revenue neutral at a very low rate (well less than 1%):

a "revenue neutral" APT tax would impose a single tiny tax rate on each and every transaction in the economy. All deductions and exemptions would be eliminated. By declaring a "zero tolerance" policy for any exemption, we wipe out every special interest loophole that now riddles our overly complex tax code. Since the volume of all transactions is estimated to be 100 times larger than the current tax base, the flat tax rate needed to raise the same amount of revenues is just a hundredth of the current average tax rate of roughly 30%. So if transactions stayed at their current level, the APT tax rate would be three tenths of one percent (0.3%) on each transaction. Even if total transactions fell by 50%, the revenue neutral APT tax rate would only be six tenths of one percent (0.6%) split equally between the buyer and seller in each transaction so each would pay 0.3%. Feige details how the replacement of our current tax system with an APT tax could save the government and its citizens as much as $500 billion annually by eliminating the compliance, collection, enforcement and inefficiency costs of our current tax system. Additional savings would accrue society in general, which are impossible to compute. Just think of all those beautiful trees that will be left standing when we stop printing the 17,000 page Tax Code and the millions (maybe billions) of copies of forms with instructions still being used at both federal and state levels.

An example

Consider a family with an annual income of $60,000, paying $20,000 in interest and mortgage payments on their house and spending $40,000 on all other items. The family has total transactions of $120,000. Today that family would owe roughly $20,000 in total taxes. Under the APT tax, with a rate of 0.6% they would pay $180 (.3% x $60000) on their income receipts and $180 on their expenditures for a total tax of $360. Their employer would pay $180 tax on the income payment, the mortgage company would pay $60 on its receipts and the merchants receiving the family's $40,000 of other expenses would pay another $120 in taxes. In total, the government would receive $780. And all the taxes would be automatically assessed and paid without filing tax returns.

How then does the government collect enough taxes to pay its bills?
Most of the revenues would be collected from the massive volume of stock and bond trades and foreign exchange transactions none of which are now taxed.

The secret to the low tax rate is the expansion of the tax base by a hundredfold  
One might be concerned that imposing taxes on these types of transactions would stifle economic activity in these critical areas, however, the tax is so small it would be dwarfed by the simple fluctuations in price that typically occur during the trading process. Although "day trading" and short term foreign exchange transactions will certainly decline, the reduction in these "hot money" transactions are only likely to reduce speculative market activity, thereby reducing the volatility of prices in these markets.

How is it a progressive tax?

Although every voluntary transaction is assessed the same low tax rate, the APT tax achieves equity and fairness because the wealthiest portion of the population executes a disproportionate share of financial transactions, whereas the poorest members of society engage in relatively few financial transactions since they have so much less wealth to manage. So progressivity is achieved through the skewness of the tax base rather than through a progressive tax rate structure.

Let me add that the APT Tax is a use tax. It taxes the use of our financial systems guaranteed and supported by the federal government that enables the US to be the envy of the world.  This kind of tax can be framed (ala Lakoff) as a reasonble fee to charge for the use of US financial and legal systems.  The more you use this system, the more you pay.  Seems fair to me.

How will it be collected?

Every bank, brokerage, or other financial account established by a person, corporation or other taxable organization will pay 0.3% on ALL funds moving IN OR OUT of that account. The tax would be automatically transferred to a federal government tax collection account in the same institution. This will be true for stock, bond, options, and futures traders and investors; foreign citizens, companies and governments exchanging their currency for US dollars; a couple buying a new car (no more 6% sales tax, instead 0.3% APT tax); and, a teenager buying movie tickets with a credit card. The movement of funds is taxed and collected immediately without recording who or what was the source of funds or the recipient. This automated system would totally eliminate the need for filing tax returns and information returns, freeing individuals and businesses of enormous costs of tax compliance and greatly reducing the government's costs of collection and enforcement.

The potential annual savings from changing the IRS charge from collecting the melange of taxes it currently does to monitoring very closely the few thousands of financial institutions involved in collecting the APT tax is estimated to be $200-500 billion (depending on various assumptions).

Since the APT tax is only collected on non-cash transactions wouldn't cash transactions go untaxed (more than they are at present)?  Currently only 6% of transactions are cash. The proposer, Dr. Feige, is a leading expert on underground and cash economies and thus suggests the following to capture efficiently the APT tax on cash transactions:

It is known that cash goes through an average of 2.5 transactions between leaving a bank or other tax collecting entity, before it returns. So a tax of 2.5 times the electronic single side rate would be charged on withdrawal and deposit.  Based on the rate we are projecting of 0.3%, that would mean a tax of $0.75 per $100 cash entering or leaving a "taxing institution/account". That sounds a bit onerous but consider that replaces all the other Federal taxes and ... sales tax at $6 to $9 per $100 spent. One would presume businesses dealing in cash might choose to add that minute amount to the purchase, as sales tax is added today, to compensate them when they deposit the cash in their accounts. Monies paid to what is now an external wiring service, like Western Union, for wiring out of the country, would be taxed at the cash rate on deposit and, again, at the "electronic" rate on actual wiring. The savings would be so minimal for small transactions to go to very much inconvenience to avoid the tax that small time evasion is anticipated as rare. Of course, there still is envisioned a smaller, leaner and acutely focused IRS or equivalent to watch the very large transactions, especially those with a foreign side.

Suppose we like this tax idea.  How to implement it?  My preference (different from the original proposal)  is to break it into several phases:

    Phase I: Pass legislation and funding to develop the relatively easy software tools to build APT tax collection into the funds settlement software already being used, along with extensive security and debugging testing.

    Phase II: Enact the APT tax at a very small rate (say 0.001%) for no more than one year without offsetting any taxes.  Use the amount collected as Congress sees fit (how about paying down debt/deficit a bit).  This should give an empirical test of the revenue that can be collected using the APT tax and a shakedown of collection or security issues, without risking financial collapse.

    Phase III: Enact the APT tax at a rate needed to offset payroll taxes completely for both employer and employee.  Also, eliminate gift, estate, and excise taxes by replacing them with APT taxes. This would give a strong stimulus to spending (more take-home pay) and to employment (reducing cost to employers) and to investment (more money in circulation).  Since the APT tax will also tend to raise prices slightly, the Fed would need to tight up the money supply to prevent an inflationary bump.  This step gives tax relief to all sectors (from low- to high-income taxpayers)

    Phase IV: Slowly and gradually replace income taxes (federal and state, individual and corporate) with APT taxes by raising the APT rate and lower the rates for the income taxes.  More tightening needed to keep the stimulus from being too inflationary.  This may take several years to phase in completely. It would entail (possibly with constitutional amendments) the development of a distribution formula to pass some of the federally-collected APT tax to the states to offset their income taxes (there will be political wrangling on this point, I'm sure)

    Phase V: Expand the state formulas to include an offset of sales taxes and (I would prefer) that part of the property taxes that go to public education.  This puts public ed and basic state services on the same stable, but pay-as-you-go footing as the federal government.  Local property taxes for running local governments would still be in effect at the end of the process.

How do you see this spinning out as a political idea?  Is it a good one? Can it be maintained a bipartisan one? Where are the landmines and pitfalls?

Originally posted to outofthebox on Tue Aug 17, 2004 at 05:26 PM PDT.

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Comment Preferences

  •  Sounds complicated (none)
    One of the issues I have with national sales tax or many other taxes is the overhead they impose.

    The more little things you have to keep track of, the bigger the overhead.

    I guess I still favor a flat tax on income, including all income as Adam Smith discussed...  Simplify it, remove all the deducitons and loopholes... and you'll end up with a tax that you don't have to file paperwork at the end of the year on.

    But it'd be a radical change, as you'd have to eliminate all the other taxes... because otherwise the result is a very regressive taxation policy.

    Of course these are all pipe dreams.

    Nice guy or not, if we're at war and I get to choose the guy in the foxhole next to me, I'll pick Kerry. At least I know he's gonna watch my back.

    by Steve4Clark on Tue Aug 17, 2004 at 10:09:53 PM PDT

    •  overhead (none)
      since APT is automatically collected (by the banks) on money moving into/out of an account, overhead doesn't seem like too much of a problem to me. You don't even file a return at the end of the year, and if you think it's been miscollected somehow (which would seem to be hard to do) you'd just take it up with your bank like any other mishandled transaction.

      Now, my problem is that I don't trust the numbers. It sounds great to me (in fact, too good to be true, which is why I don't trust it), but I'd need to spend a lot of time delving into the math behind it before I'd be convinced it's a good thing.

      •  Some Numbers (none)
        Dr. Feige has the numbers for 1996 in his paper referenced in the original diary above.  I recently googled and searched (IRS, FEDWIRE, and BIS among others) and compiled the following numbers for 2002:

        Tax Revenues 2002 (billions$)
            federal income--indiv:            858.3
            federal income--corp:             148.0
            state income--indiv:              185.0
            state income--corp:                25.9
            federal excise:                   67.0
            state excise:                     35.1
            gift and estate:                  12.3
                    FICA payroll:                700.8
                    Medicare payroll:            179.7
                    State sales:                       261.0
                TOTAL    2473.1       

        US-Based Financial Payments/Transactions 2002 (billions$)
                    checks cleared:                  38291.5
            credit card payments:           1608.3
            debit card payments:             699.7
            wired credit transfers:       731114.6
            wired debit transfers:          8597.3
            securities settlements:       332907.1
                    cash payments:           23409.3
                TOTAL         1136627.9  
                         (that's 1136 trillion dollars)

        The total revenue as a percentage of the total transactions is 0.22%, well under the 0.60% quoted in the proposal.  Even allowing for the transaction value to be cut in HALF due to people changing how they conduct their transactions (to minimize the APT tax), there is sufficient volume of transactions to completely cover all the tax revenue listed.

        •  thanks (none)
          That's not really everything I'm looking for (I'd also be interested to see what kind of secondary economic effects it has in terms of inflation, discouragment of investment, etc) - but it's a good starting point.

          I've started an email argument with my dad, who actually has degrees in this stuff (economics and policy) so we'll see if he can burst my bubble ;)

  •  asdf (none)
    "wealthiest portion of the population executes a disproportionate share of financial transactions"

    I don't think this is necessarily true as the rich will simply move their assets out of the US if necessary.  

    Be a patriot, move to a swing state.

    by Sedge on Tue Aug 17, 2004 at 11:24:39 PM PDT

  •  Wealthy and APT Tax (none)
    The wealthy cannot move offshore without paying the tax on the way out.  They cannot use any part of the US based finanacial system without paying the tax.  No investments; no credit transfers; no business purchases. They would have to completely remove themselves from the US financial world to evade.  They would essentially repatriate to a different country--all to avoid a 0.3% tax.  
  •  re: Wealthy (none)
    Oh, and remember that they would be saving taxes from capital gains and income taxes being eliminated.  
  •  Tip Jar (none)
    This is my first diary. Feedback is always helpful. Thanks.

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