Alternatives to the income tax have been bantered around our nation for years. Some propose a flat income tax, eliminating loopholes and letting everyone pay a fair share with minimal reporting. Others propose various forms of consumption taxes, essentially creating a federal sales tax. The “Fair Tax,” one of the more polished proposals, is also a fine study in the art and science of “communications.”
An apparently well-funded organization is promoting this idea of a “Fair Tax.” With a national radio ad campaign, an 800 number and an envelope full of glossy little brochures appearing in your mailbox, an unknown “they” promote the notion of this “Fair Tax.” It’s a very plausible and palatable package until you get to the bottom line: These unnamed promoters want us all to pay a 23 percent national sales tax.
Fair? Does throwing nearly a quarter to the federal government every time you spend a dollar bill seem fair? And who will do the dirty work?
The “Fair Tax,” as described, proposes to let retailers become federal tax collectors, taking over the job of the IRS. Once again, the less well-to-do will bear the costs of government while pre-retail big money escapes its share of the burden. Many dollars are being spent by someone to make such a deep skinning seem fair. A “communications” shuck and jive, par excellence.
While big money and big government would like to stick it to the consumer, there is a great tax idea that gets small mention. Remember, Democrats, Republicans and their comrades in the press corps are a political unit that make a living milking the middle class. They don’t want you to hear about this tax plan.
Too good to be true?
What if there was a viable tax system with no tax or information returns? A flat tax with no loopholes? A revenue neutral, broad based collection system that is efficient, equitable and utterly simple? A tax system that would have a high rate of compliance with a relatively low cost of administration, using existing mechanisms for collection? An end to withholding, tax accounting, depreciation, tax credits for special interests and refunds of your funds previously taken and held by the government?
And what if the federal government could be fully funded, at its current spending rate, under this plan by imposing a 0.3 percent tax rate on this new tax base? That’s right, not 30 percent, not 23 percent, not even 3 percent , but 0.3 percent. Have I perked your interest?
No Illusions
Edgar Fiege, a professor at the University of Wisconsin, proposes just such a tax system.* Although he admits that he is “under no illusion that such a radical proposal will be readily implemented,” the simplicity and fairness of this plan could please even the so-called tax protesters.
The Automated Payment Transaction Tax or APT Tax, would impose an automatically deducted tax on financial transactions at the point of transfer. Whenever a financial transaction occurs, the buyer and seller would each pay an automatically deducted 0.15 percent tax for a total of 0.3 percent.
If you cashed someone’s $100 check the issuer of the check would have 15¢ deducted from their checking account and you would get $99.85 back from the teller.
Similarly, using a credit or debit card, your account and the merchant would each automatically be charged the 0.15 percent APT tax. All final party transactions using banking or brokerage houses would be taxed at the same rate. A small price to pay considering there would be no more April 15th fleecing.
How can such a seemingly small tax fully fund the federal government at its current spending rate? The current tax base of the federal government is limited primarily to income and excise taxes. Mega-billions of dollars change hands daily on the financial markets. Businesses similarly move a lot of money around.
Personal accounts, both checking, savings and credit accounts all add up to a very large potential tax base, allowing such a small tax rate to accommodate the large costs of government.
As Dr. Fiege says, “the APT approach would extend the tax base from income, consumption and wealth to all transactions. It can be viewed as a public brokerage fee accessed by the government to pay for providing the monetary, legal and political institutions that facilitate and protect market trade and commerce.”
As a concept this is a good idea, but it maintains the illusion that our government provides the nation with a monetary institution. The Federal Reserve, as any astute student of economics would know, is a privately held entity which has assumed control of our national economy. Government ceased to operate our national monetary institution beginning in 1913.
The simple benefits of a simple system
Professor Fiege explains, “real-time tax collection at the source of payment would apply to all types of transactions, thereby reducing administration and compliance costs as well as opportunities for tax evasion. Debit and credits to bank and brokerage accounts are recorded as part of routine accounting practices. Thus, the collection and aggregation of debit statistics would impose a minimal added burden on the financial community.”
The simple system of “the proposed APT tax revenue assessment and collection system would,” Professor Fiege explained, “demand only a software modification to existing financial institution accounting procedures. The change would create a virtual tax payment account linked to every customer’s financial account.”
The Fairest Tax of All?
There would be no more filing returns because the revenue would be automatically and electronically transferred to the government.
The APT tax would also, “reduce the distortions caused by taxing productive activity, recapturing much of what economists call ‘dead weight’ efficiency losses created by the current tax system,” said Fiege.
He explains, “The APT tax would fundamentally change the incentives facing companies, altering the rules of doing business. The state’s present extensive participation in the costs of doing business provides companies with perverse incentives to inflate overall costs since they now serve to reduce overall tax liabilities. Moreover, depreciation rules, interest deductions and deductibility of particular forms of compensation create major distortions in companies’ choices of depreciation schedules, modes of financing investment and payment of compensation to factors of production. With the APT tax, companies would be free to select internal depreciation methods that reflect actual replacement costs of their capital stock, the most efficient methods of financing investment and the least costly compensation packages. Finally the APT tax would reduce distortions created by the wide range of tax rates on different classes of investment.”
Natural Market Stability
Many market speculators attempt to take advantage of short term, but relatively small percentage gains in market conditions to yield their profits. This rapid buying and selling can cause unstable market conditions. Raising transaction costs with the small APT tax could help to reduce market volatility by making such short term speculation less profitable.
Like a gas tax, the more you use, the more you pay. The wealthiest portion of the population naturally does the most money changing and would therefore pay the most APT taxes. Under the APT system, tax exemptions, tax credits and loopholes would be gone.
Special interests would no longer enjoy any special treatment. Government support of special interests would require direct expenditures, not tax relief, subjecting those interests to direct political evaluation.
The little tax that could
How can such a small tax rate generate revenue big enough to pay the largesse of the federal government?
Professor Fiege runs the numbers. “Transactions directly associated with the production of final goods and services amount to roughly twice the Gross Domestic Production. Although these transactions represent less than 5 percent of total transactions, they constitute the principle portion of the current tax base.
“[The] APT tax devised to replace federal, state and local personal and corporate income, excise, gift and estate taxes would thus have been required to yield tax revenues of $1,357 billion in 1996. In 1996 the APT tax base was 98 times larger than the income tax base as measured by the Internal Revenue Service’s estimate of adjusted gross income. Given an estimated initial APT tax base in 1996 equal to some $445 trillion and a required level of tax revenues of $1,357 billion, the revenue-neutral tax rate per transaction would equal 0.3 percent.”
“Cash” and the APT tax
“All tax systems, including the APT, are vulnerable to evasion when paper currency is freely available. One practical approach is to exact a tax on currency each time it leaves and enters the banking system. To be effective, the tax rate on currency would have to be higher than the tax rate on checking [because currency can circulate several times before reentering the banking system],” said Fiege.
From mean tax to lean tax
Professor Fiege is an expert in the underground economy — an economy created in part by an oppressive and inefficient tax system. As professor Fiege explains. “The direct costs of collecting the individual income tax in the United States amounts to between 7 and 8 percent of revenues raised…with taxpayers spending approximately two billion hours to comply with the law. Extrapolating these estimates suggests that total annual collection and compliance costs are well in excess of $100 billion. The APT collection system would bring the marginal costs of collection and compliance down to the cost of electronic transfers of information.
“Eliminating the waste linked to price distortions created by the current tax system could yield annual benefits in excess of $250 billion. The elimination of tax and information returns could yield added compliance costs savings between $100 billion and $200 billion a year. To these savings add the reduced administrative and enforcement costs resulting from the unique automated collection mechanism of the APT system. The quantifiable benefits of eliminating the current tax system are therefore likely to range from $350 billion to $500 billion per year.”
Although Professor Fiege does not specifically propose that the APT tax system replace conventional state and local taxing methods, he does suggest that states could establish resident-specific taxpayer accounts directly linked to federal APT tax collection.
Ending the need for tax evasion
“The IRS projected 1992 unreported legal-source income on individual income tax returns at $587 billion, while my own research suggests that unpaid taxes totaled $123 billion in that year. The low APT tax rate would reduce the payoff from tax avoidance,” said Dr. Fiege.
His article suggests that “offshore” tax avoidance methods could be defeated by several means. They could be denied legal protections in APT-compliant jurisdictions. APT tax compliant nations could also refuse to recognize credits or debits from “offshore” havens.
A simple, less offensive option exists, but is not mentioned in his article. Finances leaving the country for an “offshore” haven could be taxed the seller’s half of the APT tax on departure and pay the buyers half upon their return to this country. The APT tax would then be fully paid within our country and subject to the laws of the “offshore” haven when the finances are within its jurisdiction.
Who would lose?
Gone would be the IRS and its workers. Tax preparers, tax accountants and tax lawyers would soon follow. Would this be a loss to society? Stocks and other markets would cool down a degree or two with this small tax on transactions. Would such stability in the markets help keep the roller coaster on the tracks?
Final questions
The APT tax proposal fails to address issues of whether it is a constitutionally valid system of taxation. It also promotes the belief in the fantastic, elastic, fictional economy backed by the full faith and credit of people who think that paper and ink or plastic and electronic transfers are money.
While the APT tax may be valid as a constitutional excise tax, some questions remain: A tax on what? Our constitutionally mandated gold and silver economy of substance has been converted to a privatized, unchecked, fractional reserve banking system. Does the APT tax further legitimize this fraudulent conversion?
Under the APT system, the banking and brokerage houses will collect and transfer the tax to the government. Is this another cozy public/private partnership that is never likely to be subject to independent scrutiny, similar to the Federal Reserve Bank that has never been audited?
That having been said, The APT tax proposal should also be held up to the light of day so it can be contrasted against the current tax system and other tax reform proposals.
In the words of Professor Fiege, “The APT tax proposal embodies the principles that have guided all successful tax reform proposals: simplicity, equity, efficiency and reduced costs of administration and compliance. To achieve these ends, it contemplates revenue neutrality, base broadening, the reduction of marginal tax rates, a single flat tax rate, the elimination of tax loopholes, an end of tax returns and information returns, and automatic electronic assessment and collection of taxes. Not a bad deal really.”
* For a detailed presentation of the APT tax proposal read “Starting Over: The Automated Payment Transaction Tax”, Edgar L. Feige, Milken Institute Review, First Quarter 2001
The article is posted online in PDF format: http://www.milkeninstitute.org/review/2001qtr1/pdf/42-53mr9.pdf and available from the Milken Institute: 310-998-2600.
From the September 2001 Idaho Observer.
