Rethinking Taxation

It is time that the Federal Income Tax be cancelled. In order to replace the current unfair, prosperity-stifling tax regime, we need a meaningful solution beyond the simple call to reduce taxes and spending (appealing as that might be). One solution that would go a long way toward improving how the government collects taxes is the Automated Payment Transaction Tax (APT tax). With such implementation, three things would be accomplished. First, it would triple the amount of money available as revenue because it would additionally tax currency and stock transactions, as well as cybercoin transactions. Secondly, taxes would be collected transparently and anonymously. And third, it would localize taxation because the money would be collected and distributed at the local level. We would finally be able to get back to a point at which the States would be funding the Federal Government, and not the other way around.

So what is the APT? 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. This transaction tax would completely REPLACE our current system - not be added on to it.

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 and a half tenths of one percent (0.35%) on each transaction. Even if total transactions fell by 50%, the revenue neutral APT tax rate would only be seven tenths of one percent (0.7%) split equally between the buyer and seller in each transaction so each would pay 0.35%.

Replacement of our current IRS 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 to society in general, impossible to compute. At the very least we would be able to stop printing the 70,000 page Tax Code each year 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 0.7% they would pay $210 (.35% x $60000) on their income receipts and $210 on their expenditures for a total tax of $420. Their employer would pay $210 tax on the income payment, the mortgage company would pay $70 on its receipts and the merchants receiving the family's $40,000 of other expenses would pay another $140 in taxes. In total, the government would receive $840. 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 at 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 it's inherently progressive.

How will the APT Tax system work? Every bank, brokerage, or other financial account established by a person, corporation or other taxable organization will pay 0.35% 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 8.25% sales tax, instead 0.35% 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.

Capitalizing on financial data processing technology, we can create a tax system for the 21st century that is simple to understand and easy to administer, and automatically and immediately collected anonymously. No more tax returns, no lobbying of special interests, and no special deductions or loopholes.