Recap of objections or questions regarding APT:
2) Those in the above category, even those with bank accounts, who are on disability or welfare or any other government subsistence program and are exempt from taxation in the current scheme will now pay the APT tax, albeit a "tiny tax" on all transactions. The same is true for those who now receive an Earned Income Tax Credit or are at a level of poverty where they have no income tax liability. Since we will have no reporting method to verify the identity of these folks we will have no way to target specific legislation toward their relief.
3) Between Phase I and Phase II will the payment of SS/Medicare taxes withheld by employers be APT taxed when paid to the federal government?
4) Businesses, incorporated or not, which are suffering losses - these could be developmental or startup or simply companies suffering a downturn for various reasons - will incur the APT tax on possibly large transaction dollar volumes. Most businesses during startup phases, which can last for years, incur losses. Many of the most viable of these continue their existence with cash infusions from Venture Capitalists. Currently, investments in and the activities of, companies in this status incur no tax consequence whatsoever; further they can carry forward their initial losses to future year's profits. APT changes all that. With APT budding companies and potential investors will have to evaluate the tax consequences of their actions. For many biotech and fledgling pharmaceutical companies this tax burden could hinder viability. Venture Capitalists provide funds for many businesses that otherwise would not get out of the starting blocks; in aggregate many of these firms invest billions; APT adds millions to their investment costs.
5) Taxing net profits evens the overall playing field for all businesses as regards tax liability. Many companies have significant profit margins and lower volumes; others have lower profit margins and high volumes. The current tax system, taxing only net profits, establishes parity, fairness, among all these various business endeavors from a tax liability standpoint. APT punishes those businesses with lower profit margins in comparison.
6) APT purports a per transactor rate of .3%. For individuals, the actual APT tax rate will be .6%, unless they keep all their earnings in their bank accounts and don't spend them. Businesses, by the nature of earning profits will incur a .6% rate on all receipts/expenses, exempting only profits from taxes, until they disburse those profits and then profit disbursements will also result in a .6% rate. Albeit still a "tiny tax", the presentation appears disingenuous. Even the financially prudent action of saving or investing will incur the APT tax.
7) The revenue neutrality of APT at the proposed rate is seriously questionable. The examples I have presented casts some doubt by virtue of the huge dollar volume of transactions, far exceeding a doubling of the P&L transactions, necessary to make APT revenue neutral versus the current system. My example of the individual with $5 million in currently taxable income needing to incur $574 million worth of transactions to produce an equivalent amount of tax revenues under APT more vividly raises the question, and that was just to offset the current federal tax liability. The major offsets would seem to encompass those situations where the current system affords paying less, or no, taxes due to tax "loopholes", such as, carryback/carryforward loss provisions, accelerated depreciation, and a myriad of other tax savings, some nonsensical and others which provide incentives to greater growth and more job creation. Carryback/carryforward provisions are nothing more than profit smoothing techniques acknowledging the ongoing nature of business enterprises, beyond any arbitrary taxing period. The other offset would be the application of APT to purely balance sheet transactions which are not currently taxed. Things such as; investment in plant and equipment - growth enhancing and often job creating activities; transfers of funds to support affiliated ventures - a type of transaction subject to extinction under APT; the paying of dividends. Working with sketchy information at best, Dr. Feige has, somewhat arbitrarily, decided to use a factor of a 50% reduction in the 1996 calculated value of all banking transactions as his basis for the proposed APT tax rate of .3% per transactor. If the more appropriate reduction should be in the 70% range he would be pushing the maximum per transactor rate to its admitted feasible limits. A very costly study is proposed to determine the reality of the tax base. A study that could determine the whole idea is unworkable. It seems ludicrous to spend a lot of money to prove a negative.
8) Inflation impacts: Admittedly, a confusing but not especially complex issue. The Fed controls the money supply through the banking industry, better explained as, through the credit markets, by adjusting the amount of money available to banks to make loans. This affords them a tempering device on prices. They cannot control the amount of actual money in the pockets of consumers merely their access to more through borrowing. No doubt APT initially provides a huge increase in pocket money to consumers. The inflation impact will depend on what those consumers do with the extra money. Should their propensities remain little changed, they will seek to increase spending. Given, in the short term, a limited number of consumable items, prices will become much more inelastic for those limited items and the current supply. The economic consequence is higher prices. Without changes to the Fed's options they will have few tools to fend off rising prices. Should they raise interest rates, currently the monetary response to inflation, they risk hampering business borrowing for growth. Should they lower rates, due to less reliance on credit under APT, this could add volatility to inflation, to say nothing of discouraging saving because of lower returns. Even if, in the short term, inflation remains under control, in the longer term prices will seek parity with the amount of money available to consumers and prices will rise. What do you suppose the oil producing nations will do once realizing that the US consumer is much less sensitive to the price of oil? Food purchases will likely shift to more meat or more expensive meat, steaks instead of burgers, but the inflation impact would appear less volatile in the farming industry. It is likely that eating out will increase significantly, in the short term causing prices to rise, but probably will be offset with more restaurants opening in the longer term. New restaurants will enter the marketplace at higher prices however. Prices will rise on new, currently higher-end cars, again because the consumer has the funds to buy Mercedes as opposed to Chevys and the increase in demand will pull prices up. The auto market is limited in the longer term due to simple logistics so capacity increases will be somewhat muted. Though hyperinflation is a risk, one mitigating factor will be a depressed desire for higher wages. The initial increase in take home pay for workers will suppress any immediate push for more wages until they adjust their propensities or rising prices begin to eat away their gains. Guessing the inflation impact is complex; by definition positing that inflation will be a problem, less so.
9) It is assumed that an expanding economy will create an expanding APT tax base. Under current circumstances a no-brainer; with a change in the basis of taxation, at not insignificant amounts in the aggregate, businesses and individuals will begin to look for ways to minimize transaction activity. Lower and middle class workers will not be inclined to do much, due to the low impact of APT on them; they will mimic any published reports of actions taken by the wealthy and/or business though. Barter, where it is not cumbersome will expand, especially for businesses with global dealings. There could be a major shift to purchase more from foreign suppliers since their prices will not be affected by the APT tax. This could also be accomplished through funds residing in foreign banks eliminating APT taxes on all intermediate transactions.
10) The APT tax is so small that businesses will not be inclined to add it to their pricing. Again, the fallacy of arguing the "tiny tax" rate versus the aggregate tax costs. Initially this will likely be true due to the embedded current tax costs in prices, which will not change, under APT or the Fair Tax scheme. If the marketplace is willing to pay current prices for goods and services, then given a drastic increase in their disposable and discretionary incomes, they will be even more willing to pay current prices - even willing to pay higher than current prices - there will be no incentive for businesses to lower prices because the old taxation costs went away. As APT evolves and the impact of the new tax basis can be better measured, businesses will move to increase prices to offset the new taxing costs. This tendency will be even more likely given the change in price inelasticity for most goods and services.
11) Dr. Feige readily admits that APT works best, if at all, when its acceptance and application is expanded to involve all economic players; he even admits it will work better if other large foreign countries adopt it as well. I have laid out reasons that many states will not be interested in participating. The major objection will be that the states will have lost the flexibility to use income taxes as a tool in managing their budgets. As proposed the federal government would establish and control the APT tax rate. This means that the states will receive a prorated share of the proceeds based on some algorithm, perhaps based on transactions originating within their state or on some ratio of historic incomes/expenditures. Whatever the methodology, the apportionment to the states will be arbitrary and will be essentially inflexible should one state's budgetary income requirements change. From the states perspective, the federal control and collection process will be a zero sum game. There has been mention of each state subscribing to APT imposing a separate and specifically derived rate, predicated on their needs. I don't recall anything in Dr. Feige's original paper suggesting or even accepting this premise. Even if acceptable this greatly alters the simple algorithm for implementing APT. We easily could end up with 51 different APT tax rates and a process severely encumbered by trying to figure out which rate to apply to each side of a transaction in interstate commerce. What would be the driver; the transaction site, the corporate legal home, the site of the banks involved in the transaction? All these additional variables would require a much more complicated process to calculate the correct tax for each state and would force all states to require auditing access to all transactions to verify that they receive their fair share. Dr. Feige suggests that APT tax records would only allow governments access to net transaction taxing information; this will not suffice for states wanting to audit the application of their individual rates. In all likelihood we would end up with APT only replacing federal taxes severely impacting APT's Valhallic prognostications.
12) For APT to be revenue neutral to the current system and given that it is easily discernible the average worker will enjoy a significant tax reduction, it follows, admitted by APT supporters, that the wealthy and businesses will have to make up the difference. These two categories represent a powerful constituency wielding significant influence on legislative actions which could create an early veto for any attempt at accepting the APT proposal. Dr. Hermann expounds on the effusive interest of various business executives in the idea of APT, yet we see no published acknowledgement of same. We see no substantial lobbying effort pushing the APT glory. With some knowledge of business executives and their thinking, I can see where a cursory explanation of APT would spur interests in these folks. If, and when, they dig deeper, you will find much of the resistance that I offer here.
13) We see no support coming from academia or any professional economists in support of APT. Dr. Feige, himself, has not, even minimally, attempted much further argument for the idea. Dr. Hermann would "fall on his sword" as the reason for this. As admirable as that may be, he, alone, or with a few blogging cheerleaders, was not going to get this idea into the mainstream. Promoting this kind of idea requires support from experts and none seem forthcoming. Dr. Feige issued his original paper in 1999. Surely since then some budding PhD aspirant would have investigated a methodology that proposes such a painless cure to the dastardly process of taxation. Silence often speaks loudly.
I have other issues, most of which have been expressed in my individual postings, but thought these were sufficient at this time. I was also concerned that rubicon would be further upset at my ramblings.
I am not an expert. I am not a PhD. I am but a tired, old, former bean counter raising questions that immediately come to mind. Heaven only knows what further difficulties an expert would foresee. At this point, on this site, the responses to my questions fall mainly into the categories of: "I don't think that will be a problem" or "That will be worked out during the 'expensive' study". These responses are coming from adherents no more qualified than am I. Selling an idea, concept, or solution requires that substantial arguments should be in place to offset initial, cursory objections or questions. The more complicated issues do require greater thinking, usually from experts, but none seem moving to the fore. Dr. Feige would seem to have resources available to expand on the idea and the arguments in support. Nothing seems to be happening.
