The collecting of taxes is always a sticky subject for proponents of the free market to address. This is due to their natural tendency to spurn taxes in general.
Yet, if change to the current unfair, prosperity-stifling tax regime is to occur, we need to offer a meaningful solution beyond the simple call to reduce taxes and spending (appealing as they might be). One solution that might go a long way toward improving how the government collects taxes is the Automated Payment Transaction Tax (APT tax).
The APT tax is defined as,
“A small, uniform tax on all economic transactions — involve simplification, base broadening, reductions in marginal tax rates, the elimination of tax and information returns and the automatic collection of tax revenues at the payment source.”
The idea is to replace all federal income (individual and corporate), excise, and estate taxes with an APT tax. Proponents of this change argue that it would result in a simpler, fairer taxation system.
Simplification of the tax code, ending the need to fill out tax returns, and reductions in marginal rates all sound like laudable goals for a tax reform scheme to undertake. Base broadening, likewise, is important for any tax system to be equitable; after all, when a small minority is paying almost all the taxes, there is an incentive for the majority to “soak” them for more.
How would the APT tax accomplish these aims? Well, the simplification of taxation would be immediate. Gone would be the thousands of pages of the federal tax code and the loopholes, deductions, and special privileges that are the purview of its writers and their supporters. The simplicity would make compliance easy and swift.
That simplification would result in significant economic efficiency gains: there would be no more need to spend hours filling out tax returns, or to pay compliance experts and other professional tax-helpers who have grown like a mold on the present Byzantine tax laws. Nor would there be so many frictions from legal disputes over compliance. All of these things reduce the huge overhead costs incurred to private citizens directly, and to all taxpayers through the sprawling IRS payroll.
The APT tax would also broaden the tax base, because all citizens who engage in the economy (in other words, pretty much everyone) would fall under its auspices. The tax would apply as a small, automatic debit from each of these transactions. Such a system would eliminate the grotesque progressive income tax under which American citizens currently labor, as well as the current excise and customs duties that distort trade.
Can an APT tax actually work? That question is, of course, critical to any discussion of a policy. The answer is, unfortunately, unclear. Because no country has tried to implement such a tax regime, there is no comprehensive empirical evidence on which to draw. However, there have been several studies using economic data to approximate the necessary tax rates to make implementation of an APT tax system work. The Transaction Tax, an advocacy group for an APT-type tax, contends that a rate of 0.35% per transaction would balance the federal budget. Others suggest the rate could be even lower.
The APT tax presents is not a flawless answer to our revenue and spending problems. There is always a risk that such a tax would cause distortions, particularly in the financial market where there tends to be a high volume of transactions. This problem is a serious one to consider, as it could cause damaging frictions in capital markets.
However, some empirical evidence suggests that low transaction taxes cause only minor reduction in transaction volumes. The risk is still there, but it should not be enough to deny outright the possibility of the new tax system.
Despite its flaws, the APT tax offers a significant change in the way taxes are conventionally perceived. Professor Edward Feige of the University of Wisconsin suggests that the APT tax be thought of as a “public brokerage fee accessed by the government to pay for the provision of the monetary, legal and political institutions that protect private property rights and facilitate market trade and commerce.” Such a view of the purpose and function of taxes is certainly a refreshing one. If the APT tax could genuinely instill such a perception in the populace, it might well increase discontent with government spending that intrudes into, rather than facilitates, the private commerce of citizens.
The APT tax may not be a perfect solution to America’s tax woes, but it is a step in the right direction. The country is in desperate need of radical reform. Slight tweaks to the existing tax code will do nothing to solve the long-term problems of government revenue. We need ways to capitalize on the technology of the 21st century to make taxes fairer and flatter. The APT tax is worth exploring as a means of accomplishing that aim.
