Journal: Automated Payments/Transaction Tax

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The APT Tax

Instead of personal income tax, corporate income tax, state tax, fuel tax, capital gains tax, gift tax. estate tax, excise tax, sales tax

One very low universal tax Automatically and Immediately Collected

No Tax Returns, No Lobbying for Special Interests, No Special Deductions

Is it possible to have a system of taxation which is simple, efficient, progressive, and revenue neutral replacing all those taxes listed above? As it turns out, Yes.

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By capitalizing on financial data processing technology, it is possible to create a tax code for the 21st century– one that is astonishingly easy for all citizens to  understand, that is easy to administer and to comply with because it eliminates the need to file tax or information returns. The system, developed by University of Wisconsin Professor of Economics Edgar L. Feige, is known as the APT or Automated Payments/Transaction Tax.

You can find Professor Feige’s original papers detailing the Automated Payment Transaction (APT) tax by clicking the links to the left.  The papers describe a simple plan to replace our current complex system of federal and state income, sales, excise and estate taxes. It’s not rocket science; it’s actually just simple arithmetic.

In order to raise the same amount of revenue as our current tax system, 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.

How would it work?  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 $720. 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. 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.

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.

Practically speaking, how will the APT Tax work? 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.

How to move forward?

>Can we as a people take such dramatic economic action? We did take radical political action for the common good in 1776 and 1787. Now it’s time to finish the job on the economic side. So spread the word! Maybe some national figure will realize the power lodged in an idea with virtually universal benefit and agreement. What can you do? First, familiarize yourself with the details of the plan and then tell your friends and bring it to the attention of your elected representatives. We also welcome your comments and suggestions, which we will try to post under appropriate headings in our tax blog on this website.  We want to thank Professor Edgar Feige of Wisconsin for his revolutionary concept and research. This is a totally non-partisan, informational website. Hopefully our fellow citizens will recognize the substantial advantages described and demand fair and thorough further research be performed to determine how the idea could be improved and implemented?  For comments, questions, or feedback please email us at [email protected] or participate in our online community and discussion forum <> .

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William J Hermann, Jr. M.D.