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jordijordi:

I am no practitioner, but I guess that the high cost coming from IRS is not to decide who should receive which subsidies. The cost probably comes from compliance, ie, making sure everybody makes what they claim to make.

A fairly safe guess. The size and cost of the IRS is by far due to the collection and compliance aspects of their work. The data collection is basically a byproduct of the collection and return filing process. The database compiled provides a plethora of information to economists, to the US Congress, to a wide variety of groups who monitor and analyze income and wealth statistics, even providing the enforcement division of the IRS an audit selection criteria, enabling a monitor for trends and indicators of what is truly going on in our economy as regards income distribution both for individuals and corporations. There are a variety of other economic reporting systems that both feed on this information and supplement it. Most of the others rely on statistical models derived from surveys and for many of those the IRS data serves as a control variable to gauge the accuracy of statistical methods and reported results.

Dr. Feige admits that a portion of the IRS costs would remain primarily to assure accurate compliance by the banking industry in collecting and paying over the taxes collected. Your proposal would add to that residual cost, possibly making a large dent in the savings from skinning down the IRS functions.

Maybe I am naive, but I think that with a good team of statisticians, and a whole dataset of electronic transactions, it would be enough to have a progressive/regressive/younameit tax system. Something like the Fed: a few economists study the economy, and in the end, they decide the fed funds rate. In the same way, some economists could study the transactions and decide in real-time how people should pay their taxes. It would be clear in this setting who is poor and who is not poor: those who spend a lot of money are the rich, those who spend little money are the rich (there is the theoretical possibility of the rich man who leaves as a poor, but there are not many of these anymore). It would be something like a factor analysis: what decides if you are rich or not is a set of variables: the gross amount of transactions, the stability of big transactions over time, ...

The inability to grasp the complexity and magnitude of any taxing system is a naivete that most of us suffer from. Differing professional experiences afford some of us a better perspective than others, but few of us, outside of the professional economists world, have much of a picture of how the whole system weaves together. The Fed analogy is a fallacious comparison. The Fed analyzes data at a very high level. They view the movement of a variety of economic indicators at the aggregate level not at the transaction level. In making their decisions they rely heavily on the results reported by many of the statistical surveys I mentioned above. They are not concerned with performance at the individual level but with the collective economic results and trends.

It is conceivably easy to establish some dividing point at which one side is poor and one side is rich. In reality it is a long continuum with multiple data points ranging from, the very poor, to the just plain poor, to the somewhat poor, to the not poor but not in any rich category, to the somewhat rich, to the just plain rich, to the very rich. Then there are variables such as single, married, single with dependents, married with dependents, the number of dependents. These variables have a tremendous impact on the amount of benefit each receives from the Earned Income Tax Credit and many other "welfare" programs. There is no way on a purely transactional basis you can determine these variables.

Each month we have from 75,000 to 150,000 new entrants to the job market. Many of these will enter at very low rates of earnings. Many of those many, still live at home or are in college or live with others. On an individual transaction basis they may qualify as poor but based on their station in life they would not be eligible for any government subsidies. What of the child of wealthy parents who earns at a poverty level but still lives at home and provides little of their own basic needs?

The dynamism of earnings growth through the various income levels I laid out creates a moving target from which transaction analysis would have to try and derive eligibility for subsidies and the amount of those subsidies. Not only would this analysis not be timely it could often lead to my receiving subsidies long after I should not longer qualify for them. If my earnings happen to be declining, pushing me back into a poverty category, analysis of my transaction habits may postpone any aid that I might sorely need.

Dr. Feige, as I stated, envisions a tax collection system that gathers information only on the monetary value of transactions enabling an audit trail of tax collection and conveyance and nothing else. To encumber the collection process with a multitude of demographic information and then establish or maintain an organization to sift through that data and aid Congress in making spending decisions not only destroys the simplicity of the APT collection process but very likely creates a bureaucracy that could dwarf the current IRS organization. In the current system, between the payroll reporting process coupled with my personal tax filing, any claims I may have to poverty subsidies are readily determinable. The real beauty of APT, one which I do not believe offsets the inequities, is its simplicity of application and collection. Once you begin to destroy that simplicity you have begun the deathknell of the whole idea.

I don't now if you have read Dr. Feige's full paper but it is a very detailed analysis of how and why APT would conceivably work. It delves deeply into the interrelational apsects of taxing, collection and the societal benefits of broadening the tax base and minimizing the tax rate. As you add changes that shrink that broadened base, as you know, you must increase the tax rate. As you increase the tax rate and establish holes in the collection and tax application process you are pleading for tax avoidance measures. Even with his fine presentation, built on a foundation of knowledge and experience far exceeding that of we mere mortals here proposing a variety of alterations or criticisms, his net result is that more analysis and testing will be necessary to determine if the idea even has legs. Not to be demeaning but your very top level simplistic amendments and solutions decry the thoughts that Dr. Feige, and many others, poured into this whole idea.

No, what I am saying is that there are some things that cost money (police, armies, ...) but are good for the overall population, and for electronic debit cards could be the same: everybody has them for free. The plastic material, the printer, ... is paid using taxpayer money. Since we would save the materials for coins and notes, and printers for notes, the situation would be net net 0 cost.

Also, using the modified idea I proposed (investment accounts where I could buy things paying from an investment account, at no tax; the tax would have already been paid when sending the money from a normal account to the investment account), a reasonable strategy would be to automatically send all funds received in a normal account (wages, ...) to the investment account, and to pay everything from the investment account. Then, money would always be giving some interest rate, assuming the short-term money is invested in a free money market fund, with immediate availability (these funds exist already).

For security reasons, the debit card could be linked to an account with little money, with the accounts having the bulk of the personal wealth not linked to debit cards. Like I do right now with my accounts.

Electronic debit cards already exist and very possibly will be the medium of exchange in rubi's Information Age going forward into the future, eclipsing the need and use of cash. The initial problem is that a large part of the poorer population is not adept at managing money, via electronic cards or checks. Cash is easily manageable because you always know how much you have left to spend. Checks and any electronic medium require accurate recordkeeping to know what funds are remaining.

You don't seem to consider what happens for those who have no investment account and inadvertently lose their electronic debit card. If I lose my credit card I can notify the credit card company and stop any further transactions. If I lose checks, I can inform my bank and stop payment on any of those checks that might be presented for payment. If I lose my ATM card (electronic debit card) I can stop any ATM transactions. In the interim I can go to my bank and withdraw cash to tide me over until my dilemma is sorted out, a process that can take days to weeks. If there is no cash available, or if it is not an acceptable medium, then I am left with no way to access my funds. Banks are unlikely to issue new debit cards until they have had time to assess the situation nor are they likely to create them on the spot. In a perfect world all things are possible. In an imperfect one many things are not feasible.

I have expressed many times that though I am not very creative, I am very good at analysis and breaking things down. Yes, including, why something can't be done or why it's not a good idea. In your modified investment account scenario, where regular expenses can be paid directly from it and avoid any additional tax consequence, you exhibit a tendency to isolate issues and attack them one at a time rather than consider all the interrelated aspects. First of all, by allowing this tax avoidance process, you have created a loophole for a number of people, mostly the rich or the better off. There are huge numbers of our populace who would not qualify nor be granted an investment account. No firm, bank or brokerage or other, is going to set up a bunch of accounts for folks who will never be investing. There are setup costs and maintenance costs associated with any bank type account. This will require fees by the issuing party which will deter anyone of moderate or poor means from setting up an account unless they truly expect to have funds to invest. One of the most vehement complaints of the current system is the existence of loopholes benefiting a limited segment of the populace. APT, with its minimal rate, applicable to all transactions for all people, leans heavily on the elimination of loopholes.

Interest bearing checking accounts are plentiful, they do not have to be investment accounts.

The other huge failing in your modifications (loopholes) is that you keep altering revenue neutrality and thus require an increase in the rate necessary to achieve it. As the rate icreases, your "black money" is motivated to conjure up more schemes. Even the "honest" taxpayer begins to see a greater appreciation in tax avoidance options.

I agree that this is a strong drawback: if two companies create a symbiosis such that one gives a product for free, and the other gives another one for free, the system would be arbitraged. To avoid that, we should create a system of inspectors à-la-IRS, who should find out who is taking advantage of the system.

I do not know the answer to this question. My gut feeling tells me that barter could only be efficient among companies with very long and stable relationships. With a low tax rate, I do not think a say prostitute would accept in a normal way to be paid with an alternative currency, eg, cocaine. The risk that the quality is not good, or the weight is not correct, or that she gets caught with the drug, is too high if the tax rate is low.

A different case would be for companies that may have symbiosis among them. But usually, a company supplies products to another one, which is "higher" in the scale of manufacturing. For example, a company could give rubber to a tyres company. But the tyres company cannot pay with tyres to the rubber company. Usually, the rubber company will want cash, not tyres.

But I agree there is the strong possibility for the creation of consultants whose job is to find symbiotic relationships. My question is if the cost of those consultants + the risks inherent to "trusting" others + the risks that the government finds out is lower than just paying a low tax rate.

Barter transactions do not ocur for "free". The only requirement is comparable value in the goods and services being exchanged. About the only additional variable in a barter transaction is negotiating the quantities to be exchanged to effect a value balanced contract. Many barter arrangements exist today. Some of them are between companies directly and others are through brokers who deal in barter.

Before you invest heavily in a quasi-IRS operation you better be sure and make barter illegal. Politicians may be like you and Dr. Feige and assume that it will not be a problem. With the absence of tax reporting how would you go about attempting to determine who is engaging in barter? It would be hard enough to surmise in the current system.

Your prostitution/drug user anaolgy is cute but totally incongruous. Drug users are renown for not being discerning buyers. The disease causes many to buy poor quality or bad drugs. Many die from buying and using bad drug formulations. Prostitutes would gladly eliminate the middle man and take drugs directly from the johns. The johns are the ones who avoid this because of the legal ramifications of pushing drugs versus just acquiring prostitution services. Tax rates are never a consideration when dealing in illicit activities.

No one is suggesting that barter will replace normal business exchanges between companies. The vast majority of business trading would not lend itself to a barter settlement. Think outside the box though. Say you tire company is a subsidiary of a larger corporation which has a lot of vehicles on the road everyday. That larger corporation might be interested in barter deal which would provide them with new tires on a regular basis. Simplistic I know but it is the seed that will get companies thinking.

You don't need a consortium of consultants. Most companies, large and small have purchasing personnel and sales personnel. All that is needed to determine, using your term, a symbiotic relationship is for these two functions to talk. Businesses operate almost solely on "trust" in every transaction. They may use the tools available to them to mitigate the level of "trust" but there are examples everyday where a company with a decent credit rating ends up defaulting on a debt. Again, you have to start with legislation banning barter activities. The business community does not take kindly to the government passing laws against activities, especially those that they may find as necessary in certain circumstances.

In net, you are taking the idea of a new taxing methodology, one which will be an extremely hard sell in its own right and you have encumbered it further with eliminating all cash and currency, an idea that portends an even more difficult general acceptance and then you add a requirement to outlaw a business activity that the economic system might consider a frequently beneficial option. You don't effect change by adding to its complexity.

jordijordi:

In the revenue/expense stream of any business, incorporated or not, profits are not taxed with APT. The revenues will have been taxed, when payment was received, at the .3% rate, all expenses will have been taxed, when payment was made, at the .3% rate, ergo the cumulative .6% tax on business activity. The excess of revenues over expenses (profits) will not incur further APT tax until some future time when they are actually paid out, as dividends or bonuses or as future expenditures.

Of course, future profit streams are a consideration in the valuation of any company facing acquisition. This will help establish the purchase price. If an acquisition is processed as a merger or a stock swap there will be no APT tax on the transaction. If investment accounts are tax exempt, stock of the acquiring company could be deposited into the sellers investment account, no APT tax, and the seller could commence selling the stock, if he desires, and no APT tax. If a cash sale, requiring a loan by the acquiror, the APT tax would eventually be .9% on the acquiring company. A .9% tax plus the interest, and the interest is at the stated rate plus a .3% APT tax, would certainly be analysis factors in determining the viability of any acquisition.

There is unlikely to be a rush of vertical integration company buyouts but APT adds a variable that makes the analysis necessary and if all other acquisition issues appear favorable you could see more of it happening than under the current tax system. Again, pulling back in house activities that have been outsourced, will likely occur more frequently.

I am of the firm belief that APT, even as presented by Dr. Feige, would lead to a whirlwind of "legal" tax avoidance activity by the business community, including barter, acquisitions, eliminating outsourcing, and a plethora of ideas that my feeble mind cannot even comprehend. As you make alterations, exempting some transactions from taxation, thereby increasing the APT rate necessary for revenue neutrality, you make the search for avoidance ever more profitable.