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A possible solution to the problem exposed before:

"My main concern would be that we would penalize then forming a small business: a private person, with the possibility of buying some shares, or opening let's say a small shop, would prefer to buy the shares for tax reasons (ceteris paribus)."

could be as follows: accept investment accounts, where all kind of buys and sells can be performed without incurring in any kind of tax, but tax once at the entry of the funds in the investment account. In this way, "costs" would be taxed, but not profits. So, reduce your costs, maximize your profits, and automatically your taxes will be minimized.

In fact, if I assume that the APT is paid only by the "sender of funds" from a normal account (not an investment account) this would be taken into account automatically: once somebody sends money from a normal account to an investment account, there is a tax payment. But not when funds are sent from the investment account to the normal account.

This would align investment in "normal" businesses with investment in stocks.

Thanks again for replying. Definitely, there is no other country in the world that could create a forum like this to discuss these kind of issues.

I understand your analogy about the Fed. Of course, the Fed has one target, the Fed Funds. But the Fed has other instruments for monetary policy: the discount window, the new TAF, and other instruments created in the last months whose name I do not remember right now. And it can change the percentage of reserves. And some other things.

So, even the Fed, with a simple issue like monetary policy, has several instruments. And in crisis, others appear (the TAF, ...). It is unavoidable, I think.

I agree completely with the creation of a Fed-like institution about fiscality. I thought about this some time ago: they would meet like the FOMC, and they would give a target for the taxes in an APT world.

But for sure, you would need at least another variable: the progressiveness/regressiveness of the system. Unless you include this, no left wing party will buy APT. So, APT will not be implemented in practice. It should not be a too complex thing: just maybe an initial, non-taxed amount for your income. Or a figure that increments linearly with income. But you see, I have already named "income", which is inconsistent with an APT world. Maybe an APT is sufficiently progressive for the left wing parties. But what happens when there is a crisis in housing? The Fed has reacted, and has saved Bear Stearns. But they have not saved little Joe from bankruptcy. So, they have taken a political decision (a regressive one). The fiscality would be the same. Purity cannot be kept.

Art A Layman wrote:

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jordijordi:

My congratulations. Although I don't find myself agreeing with much of what you propose you do seem to have a much better grasp of our situation than many who live in the US.

You should know that in Dr. Feige's paper there is no mention of a separate, corporation or otherwise, institution that controls the taxation process. There is good reason for that. It is absurd, pardon my harshness, to suggest that the revenue generation, necessary for the operations of the government, should be outsourced to an independent agency beyond the control of the government. Of course, we all know that no independent agency is beyond the control of the Congress. Tomorrow the Fed could be gone should the Congress decide such. The banking industry could be obliterated should the Congress decide so. Notwithstanding a Presidential veto.

Much of the haranguing about a new, Valhallic tax structure is predicated much less on a desire to effect a more efficient process than to eliminate the possibility of a more progressive tax structure. I'm sure from Dr. Feige's perspective, efficiency is the most important factor. It is the wont of all economists. Given that, there still seeps into his analysis, from time to time, the appearance of political motives. I am not suggesting that it is devious or malacious, for many economists are of the opinion that a progressive tax structure is anathema to a robust economy. The Laffer Curve being a prime example. Your astute observations of Congress continuing to tinker, even under APT, leads us to this idea that we should strip taxation away from the Congress. Would we accept a business practice where control of revenue generation was isolated from the operations of the business?

APT, as presented, does have a semblance of progressivity. I don't buy it as commensurate with progressive tax tables but the increased financial activities of businesses and the wealthy would result in them paying more taxes. Most of these voluminous transactions represent investment activity. To exempt investment activity would make a huge dent in what progressivity there is in APT. Because of revenue neutrality and tax fairness, exempting investment activity does drive a transaction tax rate higher, as you propose, but it also offers a greater reward for developing alternatives to normal banking transactions. I have written much that revenue neutrality becomes highly suspect under an APT arrangement, at the rates proposed, and I further have asserted that creative ideas will be developed to bypass the application of APT taxation, even at those low rates.

In fairness, I can understand the argument for a separate entity because if Congress is allowed to tweak APT we will end up right back where we are today; maybe even worse. Congressman Fatah has a transaction tax proposal which attempts to incorporate many of the tax exemptions/deductions existing in today's code. There are other transaction based proposals out there, one which is very similar to your idea. Again, in fairness, APT, due to its application to all transactions, would be far easier to implement and maintain than those that begin to create exceptions or varying tax rates for different activities or even exempting some transactions from taxes all together. The more complicated you make the algorithm the more likely you will encounter unintended consequences.

The current tax code in the US is full of confusing exceptions, loopholes, even voids. It does need to be streamlined and made more efficient and more progressive. It is the best vehicle available to the government to incentivize actions deemed beneficial to society as a whole. Surely you can argue over the social benefit and fairness of many of those incentives but to take away the facility to effect social benefits to society is not moving us to a better place. Now it is argued that Congress can take these same actions through spending programs. Some they could but many others they couldn't and this scenario leads to significant inefficiencies in government legislation. The latter is another one of those veiled objectives of many of the new taxing proposals. Much of the legislation to aid or incentivize, or de-motivate, or to control, social and fairness objectives is driven by the data collection of the IRS. If you eliminate the IRS, another goal of APT and the Fair Tax and others taxing schemes, you will have lost that treasure trove of information which enables analysis and decision-making. Would a business do away with a database of current and historical data; of data, the analysis of which would lead to improvements in product innovation or procurement methods or successful inventory management or improvement in manufacturing systems?

In my opinion, taxing black money is the most important issue. Efficiency and progressivity are secondary, in my opinion. Additionally, as discussed, government would not allow perfection in an APT-world.

My simplest example in this argument is the Earned Income Tax Credit. That is a credit that allows those with dependents, usually children, earning below poverty level income, to actually get money from the government via the income tax process that was never paid into that process. It is a negative income tax and it surely is a welfare program. It is effected through the current payroll/withholding/income tax system. The eligiblity for these benefits is determined through the payroll and income tax filing process. If you eliminate the vehicle to communicate eligibility, how would the Congress know who is in need and entitled to these benefits?

I do not see any problem in implementing subsidies under an APT-world. The APT just limits how people are taxed, not how government spends the money. In this sense, an APT-world would be fairer, since it would allow to determine more precisely who deserves a subsidy and who does not. Many people live under black money currently, and they are legally eligible for subsidies. This is unfair. Electronic money would make much more difficult to claim poverty under richness.

The government could simply send cash to the poor people, irrespective of taxes.

Eliminating cash all together probably doesn't get any legs. It would seem in today's credit card/ATM world that it would be simple but the idea is full of inequities for many people. Many credit card and ATM transactions are subject to bank fees and this would just impose another layer of "taxation" not going to the government.

In comparison to the cost of police, army, jurisdiction, ... a fee for transaction would be very low. Additionally, in Spain at least, debit card transactions are free (credit cards are not).

On your ideal of taxing criminal activity. An admirable goal, however, it is the nature of criminals to break laws and as yet no government has been able to stay ahead of the criminals in innovative ideas. If you cannot eliminate cash, then, even though GE would not transact business in cash, the criminals would and they would figure out a way to circumvent any attempts to collect taxes from their activities.

Barter would be the only option, but barter is inefficient, especially with a lowish tax rate.