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, estimates 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 would REPLACE 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. A transaction 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.

A transaction 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 a transaction tax and our current income tax, as well as the proposed consumption taxes, is simplicity and breadth. By taxing every single transaction that occurs in the economy, including fund transfers between accounts and transactions involving the exchange of bonds, securities and foreign exchange, a transaction tax can be very small. 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 progressive maount of transactions that the wealthy and big financial institutions conduct, 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. This system eliminates the need for a 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 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 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.

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.

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William J Hermann, Jr. MD, Director APT Tax Project Contact: