Frequently Asked Questions
by William J. Hermann, Jr. MD, Director

1. Is this an Ad or a political agenda?

NEITHER...This is a serious attempt to spread an idea that will significantly and favorably change everyone's life regardless of political party or persuasion. We are not commercial, NOT selling anything, and at this point not even trying to raise money (but would consider financial backing, if interested, due to the high cost of doing anything on a large scale). We are patient because we know that this small "fire" of an idea should spread by word of mouth and keyboard across the fruited plain rather rapidly. Remember even politicians pay taxes (most of them, anyway).

2. In order to remain revenue neutral, bringing the same amount of money to the Treasury as under the old system, with very low individual rates, the progressivity gain necessarily shifts the burden to business. Will business not transfer the tax right back to the individuals and will the tiny rate of 0.3% per transaction be "cascaded" into a much larger amount as goods are assembled through intermediaries before the final pricing at the retail level?

The traditional system taxes either the individual or business at relatively very high marginal rates and the tax code in its complexity adds additional compliance costs. Therefore there is an old concept that unless a business passes these taxes and associated costs on to the final price it is doomed for failure. Furthermore, if the tax is applied at every level of production the cascade effect of every business passing along the tax will be disastrous at the retail level. But as I said, these concepts are fallacies when considered in the context of an extremely small rate. First, the wholesale "inflation" rate, as measured by the Producer Price Index, theoretically effects pricing at every point in the supply chain and that is typically 50 TIMES the APT rate. The reason these price increases don't cascade is that the market price will not always tolerate such "automatic" increases. So companies are forced to lower costs and become more productive to combat "inflation." That activity has spurred innovation and achieved our economic leadership. Secondly, the idea that the tax will be automatically passed through is wrong from a market perspective. All business throughout the supply chain will experience significant tax and compliance cost reduction as well as the loss of the employer FICA payments. The removal of these taxes, tax strategizing, and compliance requirements will reduce business costs more than 20%. Therefore, it is likely that even if the tax is added back the net is still a very large net negative which will interrupt any cascade effect.
Regarding the ability to dramatically reduce taxes on the individual and business and yet stay revenue neutral. One must study the pie chart below. The tax base is extremely large and includes large segments that are not now taxed including, but not limited to, all security and derivative transactions, all foreign exchange transactions involving the US dollar, illegal transactions in cash, transactions of companies losing money, transaction involving transfer between accounts, etc. However, because it is anticipated that businesses and individuals will take steps to reduce transactions, despite their huge net savings from the "old" system, the actual tax base of $856 Trillion is cut in half for the rate calculations used in the proposed APT plan.

3. What would be a prudent implementation system?

After the political will is firmly expressed to transition to an APT Tax system, a bi-partisan, expert Commission should be established by Congress to study and define all of the details needed to be considered in modifying the current software to capture all transactions while providing security and privacy. After the fine points of the system are designed, a year of computer simulation could be used to test the software and certify estimates of revenue without any money changing hands. Once proven, the entire APT system to replace all federal taxes will be implemented so as to allow the savings at the business level to prevent any pass through cascade effect as described in Question #2 above. The following three phases could be forseen:

Phase I: All Federal income, estate, and excise taxes are removed over a period of a few years with adjustments in the money supply to avoid excessive inflationary pressures.

Phase II: Social security payroll taxes would be rolled into the APT rate.

Phase III: A mechanism could be established, probably requiring a Constitutional amendment, where an entity controlled by Congress, would collect additional taxes under the APT system to fund all state budgets allowing the elimination of state income, sales, and excise taxes as well as the public school portion of the local property tax.

There may be a small upward rate adjustment required to accommodate Phase III. However, the possibility exists that the multiplier effects of Phases I and II will generate more than enough revenue to incorporate Phase III.

4. Who would oppose this virtually, universally beneficial concept?

It is a very small group (but they too, all pay taxes) whose livelihood and career is based primarily on our unwieldy tax system eg. H&R Block, Inc., IRS employees and others working in the collection side of state and federal government, attorneys and accountants that primarily deal with form submission and very basic issues tax (of whom, I am told there are relatively few).

Speculators in securities, derivatives and foreign currencies will find the costs of frequent trades increased especially since brokerage fees have been reduced dramatically. The argument will be made that liquidity will be removed from the US markets. This may be true however there is really no other place to go since the US markets are so much larger than others even if some "hot" money left. Markets were fully liquid several years ago when longer term objectives dominated investing. Some governments will appreciate the evening out effect that will occur if speculation is significantly reduced. In any case as with the rest of the tax base the APT plan makes provision for loss of fully one half of securities and foreign exchange transactions. The truth is virtually anyone opposing this universally beneficial tax plan will have an obvious selfish interest basis which will be clear in their arguments. Such selfish interests will not provide a basis for all citizens continuing to pay 70 to 100 TIMES more taxes than they have to while continuing to file forms and live under the specter of the IRS.

The stimulatory effect of returning these tax dollars (gradually) to the consumer will create robust growth and job opportunities should abound. It is this growth, saving and investment that will increase tax revenues without increasing the tax rate and allow the APT concept to be potentially expanded to include FICA/Social Security and the largest part of local property tax that serve school districts (see phase in suggestions below).

5. Wouldn't there be a (further) loss of discipline among politicians who, once they swallowed the big change from the current system, would realize that they could increase government spending considerably with infinitesimal increases in the tax rate?

Relatively large programs would require only at the one-hundredth decimal place increase and government would grow that much further... Even the multiplier effect on the economic growth expected from adoption of the APT system will fill the government coffers without a rate increase. We would hope the public rhetoric would serve to control this natural urge and considerable progress on reducing the national debt could be made. But in the long run this is obviously NOT a reason why we must all continue to pay 100 times as much in taxes as necessary under the APT Tax.

6. what are some of the positive and negative ramifications of a change to the APT Tax?

Some that come to mind are listed below. As with any major change what is viewed as positive for one group may be considered a negative for another. These are listed in accord with the expected majority point of view:

Strong dollar due to economic stimulus attracting foreign investment where no income or excise taxes exist. Public insensitivity to expansion of government budgets and commensurate regulation.
Very low interest rates due to extra savings by individuals and attraction of foreign investment capital allowing lower cost capital and infrastructure expansion. Very low interest rates for people relying on secure, fixed sources of income.
Budget elasticity for government including the ability to respond to special demands such as war or national emergencies. Loss of tax incentive for charitable contribution. People will have more wealth to give but must do so without economic advantage.
Eliminate budget deficits with minor adjustments in an already extremely low tax rate. Eliminate accumulated national debt through same mechanism if desired - further strengthening the currency.  
Multiplier effects of economic stimulus creating greater numbers and value of transactions in an upward spiral reducing rates or allowing more services.  
Incentive to move toward a "cashless" system.  

7. Isn't there a big loophole around the APT Tax by simply using cash?

We must remember from Dr. Feige's bio - his expertise is in cash and "underground economies" so this topic is pretty well covered. 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, if we can come to the agreements required to implement Phase III (see FAQ # 3) instead of 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.

8. What has been the experience of current and past transaction taxes in other economies?

First and foremost, there has never been a complete replacement of a federal tax system by a transaction tax. All have been add-on taxes to create fast revenue. For example, the taxes in several South American countries such as the largest, Brazil, have had only moderate acceptance simply because they are in addition to already high taxes with no relief. Therefore, problems such as the cascade effect described above are present. A similar experience was seen when the "turnover tax" was attempted in Europe following WWI. However, in this latter case several other severe negative influences were also present. In Australia, a transaction tax was tried at the state level, without federal participation, rates and their application were not uniform, and, once again, it was an add-on tax.