It could be possible to keep filing statuses and deductions under the new system.
The solution is to have a flat sales tax with no deductions, exemptions, statuses, etc. If you want to allow for people with lower incomes to pay less tax as a percentage this can easily be done. Let’s say the tax rate is 10%. If you make $0 to $10000 a year your rate is zero. Incorporating a linear growth rate from $10000 (0%) to $20000 (10%) will not result is a case where a higher gross pay equals less net pay. Here’s the best part - everyone pays 10% of their paycheck to the government and you only file if they owe you money.
A flat tax will never work. The bottom 51% will gang up to vote higher taxes on the upper 49%. 
Progressive tax structures are the only democratically stable form of taxation.
This was recently debated here and there were many serious questions raised. I can’t see it working, for reasons given in the thread.
A couple of problems with the proposal in the OP.
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It won’t work for stocks. Taxes on stocks are based on a *net * profit, if you sell a stock at a loss then no taxes are incurred. Taxing all stock sales, which the OP seems to be proposing would kill the stock market as we know it. If the tax rate is 10%, then a stock would have to gain more than 10% to be profitable. Good luck on that one.
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As others have pointed out, trying to keep a progressive tax rate on income is impossible without maintaining an annual accounting system. Let’s go with an extreme example. “A” gets paid $365,000 in one annual paycheck and pays the maximum income tax rate of whatever – 29%. “B” gets the same annual income, but is paid daily $1,000 and pays 12%.
Saying something can be figured out doesn’t cut it. Something has already been figured out, and is in use. If there is a way around this, please demonstrate who it would differ from the current system.
Bonus point challenge: I’m the CEO of a large corporation and I arrange to have my $35,040,000 annual salary paid in 15 minutes intervals by direct transfer to my bank account. What is my tax rate?
- Calculating deductions. Assuming problem 2 is addressed (which I can’t see a solution, but please enlighten me) then keeping the same deductions would require the some sort of filing system. How would you determine the tax percentage unless you file? Any changes in deductions would require additional filing, say you had a child then you would need to refile. Purchase a house or get a divorce, same thing. How would you obtain the correct tax percentage? File? Self report?(Really, i’ve got 75 kids! ) How long would it take before the change of status occurs? What would you do about the amount you have underfiled or overfiled?
Since a lot of deductions are based on a maximum amounts, it would not seem workable without an annual accounting system.
A major problem with the US tax system is that it allows too many deductions for varous special causes. Greatly reducing the number of tax deductions and credits would make filing much easier.
Originally Posted by SaintCad
The solution is to have a flat sales tax with no deductions, exemptions, statuses, etc.
I did not advocate a flat-tax system! I was merely pointing out the the OP’s idea would suffer from problems with a progressive tax system. Those specific problems *in the OP’s original plan * could be solve with a constant growth tax rate of which a flat tax is one with a growth rate of zero.
A flat *income * tax, perhaps?
The only way to go.
The trouble is that this is essentially a tax on liquidity…since you are taxing transactions, you should expect fewer transactions. What exactly is the point of taxing me if I move money from my checking account to my savings account, or if I cash a check, or if I withdraw money from my checking account? Everyone will just switch to cash for everything. If everything is done in cash you incur no taxes, right? While it might be inconvenient to use cash for everything, it’s also pretty damn inconvenient to be charged a 32% tax every time you deposit money in a bank account, plus 32% every time you spend money from that bank account, then whoever you write the check to is charged 32% when THEY deposit the check. And all this is regardless of whether the check is “income”…if I write loan my buddy 200 dollars until next week, I’m charged a 32% tax, when he pays me back he’s charged a 32% tax?
Don’t tell me the rates will be much lower than 32%, they’re going to HAVE to be on that order if we imagine revenue neutrality. The money for taxes doesn’t come from nowhere, if government takes in the same amount of money that means taxpayers have to pay the same amount of money, even if different people pay different amounts at different times than they do now. If this replaces the income tax, then your average person is going to have to be charged about 30% of their annual income in transaction fees…somehow. This means the average person is going to attempt to drastically reduce the number and amount of “transactions” they engage in. Which means switching to cash, despite the hassles involved. No more credit cards, no more bank accounts, no more mortgages, no more loans, no more checks. Which means a drastic decrease in the revenue the government takes in, since no one engages in taxable transactions, which means the tax rate on each transaction has to increase…which further increases the incentive not to engage in it. Simple Laffer curve.
The other thing it does is make low-margin businesses impossible. For instance, there are lots of businesses that purchase goods for (say) $0.99 and sell them for 1.00, making a .01 profit on each sale. Currently they’re charged taxes on their profits, meaning if the tax rate is 30% they pay $.003 per sale. OK, then just charge everyone a 0.3% transaction tax and they pay the same amount. No wait, it has to be 0.15%, since they’re taxed on the $0.99 purchase and on the $1.00 sale. But what about businesses that purchase goods for $0.50 and sell for 1.00? They make a .50 profit on each sale, but are paying LESS than the low margin business.
Right now we have tax system that roughly charges you on your “net” income, this proposal changes that to tax the gross, regardless of expenses. Under this model a business that barely keeps its head above water…or is losing money…pays the same or more than a business with large profits. Essentially, any time the transaction tax is larger than the profit margin on any transaction then that transaction won’t take place. Expect a lot of business failures.
I don’t see how the plan in the OP simplifies things at all. The purpose of filing every year is to reconcile the many different income streams that people may have. I don’t see how you get around this with this plan. You are going to have to declare this stuff somehow. Surely you are in effect saying instead of filing every year, we should file every single time something is taxed? Sounds like a billion times more work to me!
Recently debated here. I’d be interested if you were able to answer the questions left on the table.
The author accounts for this effect in the proposal. (Read Q #7 in the FAQ section.) Remember, even cash only businesses (unless they’re fully and completely “underground”) make deposits of daily receipts and withdrawals of operating cash from banking institutions. Dr. Feige proposes a rate for cash deposits and withdrawals approximately 2.5 times that for electronic transfers of money. The projection for this rate would mean about 75 cents out of every $100 transaction would go the government.
What you might not have accounted for is that right now only a small part of the economy is actually being taxed. The income tax is basically a tax on labor, and it makes up about 75% of government revenue while wages make up only a very small percentage of the total value of financial transactions. Most of the rest of government revenue is provided via excise taxes of one form or another.
The APT tax proposal is a flat transaction tax (a tax on liquidity, as you say) which would broaden the tax base by about a hundredfold. (See the pie chart under Q #2 in the FAQ section.) This would take the burden off of “your average person” and spread it out to every entity participating in the economy. And because more money is moved more often by individuals in the highest income groups, the “flat” APT tax is inherently progressive -not because of any structural feature of tax policy, but simply because of the inherent nature of the tax base.
Well if I were being hit for 32 cents out of every dollar, I’m sure that’s what I’d do. If I’m paying a fraction of a percent for each transaction though, I’m pretty certain I’d keep the convenience of having credit, insured deposits, a mortgage, etc. However, Dr. Feige does take into account such a suppressive effect, and makes his revenue projections based on an assumed 50% reduction in transactions volume.
While that curve is pretty simple in concept, you must realize you get a different curve for each different type of tax, and each curve is also affected by expenditure policies. Here’s a good exploration of those relationships. (Warning; it’s a pdf.)
I’m not sure what marginal tax rate would prove to be optimal for an APT tax, or how much an excessive rate might shrink the expected tax base but I’m fairly comfortable that the author’s starting assumption of a 50% shrinkage upon introduction errs substantially on the high side.
It shuffles the equations, but makes nothing that is possible under the current system impossible under the proposed system.
Part of the budgeted costs for any product is the taxes and duties associated with procurement of the raw materials. Overhead costs include those taxes associated with operational expenses. So while the taxes on purchase transactions and sales transactions under the APT system might approach or exceed a company’s profit margin under the present system this does not necessarily imply that low margin businesses would be hurt by the change.