The 'Fair' Tax

Past polling has suggested that, when properly explained, the "Fair Tax" proposal, which would end the federal government's fixation on punishing those who work hard, is extremely popular. But tell that to the man who has championed it in recent years, U.S. Rep. John Linder, R-Ga.

Linder, who began his stint in Congress more than a decade ago, is a dentist by training, a successful businessman in his past career, and as bright a public servant as one would ever hope to meet. But in Washington, like everywhere else, there are certain "circles of power," certain styles which are expected, and a huge aversion to rocking boats unless such rocking is really a gentle push, or the public wants the boat to be taken to the depths of the deep blue sea.

The problem is that John Linder is a true boat-rocker, and while members of Congress will pay lip service to such men or women of conviction, they also lack a comfort level with them. And admittedly, Linder's somewhat aloof style has made his popularity among some members somewhat problematic. House Speaker Dennis Hastert, R-Ill., an immensely likeable and level-headed leader of his party, has reportedly done everything but hire magician David Copperfield in an attempt to make Linder disappear from a rightful seniority driven stint as House Rules chairman.

One wonders if Hastert has done a personality check on other powerful House members, such House Ways and Means Committee Chairman Rep. Bill Thomas, R-Calif., known far and wide as one of Washington's most arrogant and unlovable members. Linder, for all of his dandified ways, is a saint compared to Thomas, and a heck of a lot smarter.

Interestingly, it would be Thomas' committee that would have to approve and forward to the House floor Linder's novel and popular taxation proposal.

But being smart and devoted to a cause rarely gets rewarded in the nation's capital. For years, Linder, whose proposal would shift taxation away from punishing production and toward taxing consumption, has reportedly tried in vain to get the Bush White House and top congressional leaders to seriously consider this logical proposal. But Linder's efforts have yet to prove fruitful.

You see, pushing for complete overhaul of something as broken as our current income tax system, when the overhaul doesn't benefit some major source of political power in Washington, is never viewed as smart politics. So rather than fight for an end of a form of taxation that results in putting a burden on initiative and risk; requires a bloated bureaucracy to enforce its intricacies; and supports a world of big accounting and law firms, the real legislative push this year will be for the so-called "privatization" of Social Security.

Now that's something that might fly, right? After all, allowing taxpayers to put some cash away in private funds might just give a big boost to those who handle investments. Not that I'm opposed to the concept. But with a thousand questions out there about the proposal's cost and workability, this proposal seems far more radical and risky than the life-altering taxation change proposed by Linder.

The fact is that John Linder has devoted his entire adult life to advancing truly conservative ideas. And on a personal note, I write this knowing full well that I am not someone he particularly enjoys reading. But unlike some of his colleagues in the House, I can shove aside the fact that John Linder is not my biggest fan and recognize his immense value.

He is as thorough in his research and planning as anyone who has ever set foot in the House. And while he is not warm and fuzzy, he is sharp and competent, which is much more than can be said about most in his business.

And he is no outsider. During Newt Gingrich's stint as House speaker, Linder played a critical role as head of the Republican Congressional Committee. GOP hardcore members will recall that the 1998 version of that effort turned out less than spectacular. But take it from one who knows -- the problems with the Republican battle that year were not of Linder's making.

And so, some six years later, we head into a new year with hopes of a true overhaul of our tax system probably having little more chance of coming to pass than Linder being tapped for Rules chairman. I've said it once and I'll say it again -- the Republican Party needs to go back to its Ronald Reagan philosophy of governance. They can start by giving John Linder and his proposal the respect they deserve.

An Alternative Approach:

AUTOMATED PAYMENT TRANSACTION (APT) TAX
Taxation technology for the 21st century

Dr. Edgar L. Feige, Professor Emeritus of Economics from the University of Wisconsin-Madison and the originator of the APT Tax concept, has just produced new estimates suggesting that a broad-based transaction tax as low as six tenths of one percent could replace the entire Federal and State 2005 budget revenue requirements of the United States of America.

The APT concept is elegant in its simplicity - potentially replacing the entire federal and state tax system - including income, corporate profits, excise and estate taxes - in favor of a tiny tax on all transactions. The tax would be automatically deducted from special taxpayer accounts, linked by software to all accounts at financial institutions capable of making final payments to the government seamlessly in real-time. The APT tax therefore eliminates the need for individuals and firms to file income and information tax returns. This is estimated to save citizens and the government roughly $200 billion per year in administration, enforcement, evasion and compliance costs, roughly seven times the amount currently being spent on homeland security.

The APT tax seeks to maximize the goals of both the government and the people - collecting necessary revenue with the lowest possible tax rate. The difference between the APT tax and our current income tax, as well as the proposed consumption taxes, is simplicity, progressivity, and breadth-the APT tax allows for significantly lower rates spread more equally throughout the world of economic activity. The APT is a transaction tax, and as such, taxes every single transaction that occurs in the economy including fund transfers between accounts and transactions involving the exchange of bonds, securities and foreign exchange. Because the wealthy conduct a disproportionate share of these financial transactions, the tax is highly progressive despite its flat rate. Progressivity is achieved through the skewness of tax base itself rather than through the progressive income tax rate structure of the current system. The very small tax is "sliced" off each side of every transaction as it moves electronically through banks and all other qualifying financial institutions. The tax collection is orderly and transparent, the rules are simple and universal and apolitical. The APT system eliminates the entire present tax code. No more exemptions, no more deductions, no more special interest loopholes and no more tax returns.

Feige's 2005 projections of total debits of $881 Tril., and total transactions of $832 Tril. (based on the most recent 2002 Bank for International Settlements data) update the figures he used in his original paper, published in Economic Policy in 2000. Taking the average of these two estimates ($856 Tril.), he conservatively assumes that the replacement of the current tax system with a revenue neutral APT tax will reduce total transactions by 50%. The projected potential APT tax base for 2005 would then be $428 Tril., permitting a revenue neutral flat tax of .57 percent on all transactions or .28 percent on each (buyer and seller) transactor to replace projected 2005 Federal and State tax revenues.

The tax rates required for a "revenue neutral" tax are divided into three phases which are the result of a suggested implementation plan that would gradually replace virtually all Federal and State taxes. The projected tax rates are calculated conservatively, assuming that only 50% of the potential 2005 APT tax base is available, since the volume of total transactions is expected to fall with the introduction of the APT tax. To the extent that transactions decline less than is assumed in the current calculations, an even lower tax rate would be able to raise the requisite revenues. As individuals and businesses use their new found economic freedom, transactions naturally grow over time, suggesting that future tax rates could be even lower.

Utilizing 50% of the projected APT tax base for 2005 of $856 Tril., that is, $428 Tril, the estimated tax rates required to raise the revenues projected for 2005 budgets are as follows:

Phase I (Eliminate all Federal taxes other than SS and Medicare)
Required revenue neutral target=$1.242 Tril:
Required tax rate = 0.29% per transaction or 0.15% per transactor.

Phase II (Eliminate all Federal taxes including Social Security and Medicare "payroll" taxes)
Required revenue neutral target = $2.036 Tril.
Required tax rate = 0.48 % per transaction or 0.24% per transactor.

Phase III (Eliminate all Federal taxes including Social Security and Medicare "payroll" taxes and all State personal income; corporate profits and sales taxes)
Required revenue neutral target = $2.436 Tril.
Required tax rate = 0.57% per transaction or 0.28% per transactor.

The estimates above are based on 2005 revenue and transaction projections. Implementing the three phases will require several years and careful government management, especially the third phase. However, Dr. Feige has built in a safeguard for the APT Tax by calculating the required tax rate based on only half of the transactions that are actually observed.

Examples: Assuming full implementation of Phase three:
1. $100 restaurant bill would have a tax to the customer estimated to be 28 cents and the restaurant would pay 28 cents.
2. $50,000 family income deposited and spent or moved to savings results in $100,000 of transactions paying a total tax of $280 distributed over all the individual transactions as they occurred through the year. These amounts would be doubled if businesses fully shifted their tax burden to the consumer, but nowhere near the $15,000 to $20,000 the family would pay under the current federal and state systems.

It is now important to begin the process of planning the economic, legal, technical and administrative requirements necessary for a smooth and transparent transition from the current tax system to an APT system. The proposed, new collection system will be tested by computer simulation to capture all potential errors and omissions (new job for the IRS). Then, it will take several years to rollout, especially Phase III involving central collection and distribution to the States. A national commitment to this revolutionary, fair, automatic and lowest cost tax system is needed NOW!

For more details, please visit www.apttax.com

William J Hermann, Jr. MD, Director APT Tax Project Contact: administrator@apttax.com , 713-932-3773

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