Discussion of the APT Tax

Karl Denninger

Karl Denninger, author of LEVERAGE: How Cheap Money Will Destroy the World

I don’t like the APT for a number of reasons, one of them being that it directly impacts (targets, natch) monetary velocity.  Since the prime economic equation is “MV = PQ” anything that reduces “V” will either cause “M” to expand or one of “P” or “Q” must decrease.

The problem is that “V” is not evil; it’s a side effect more-or-less, and it ought to float.  In short the APT targets the wrong thing; government’s job as a monetary authority (the sovereign right to coin and control monetary aggregates) ought to target “M”, not “V”.  It
appears that the intent of the APT is to reduce financial speculation by taxing it, but it’s an indirect attack on the problem rather than going to the source, which is effective counterfeiting of the currency through unbacked credit emission.

There are other problems with it but that’s enough for me to be opposed, as the distortions that the APT would introduce would be extreme and highly-destabilizing as a consequence.

The reason I like the Fair Tax is that a tax system has a number of obvious (and not-so-obvious!) goals.

1. The government is inherently and always a redistribution mechanism.  That’s all government does.  As such that which people want from it has to be paid for.

BILL HERMAN:  Although I care deeply how our tax money is used – that is for another discussion, planning a tax collection system MUST; (1) use the largest base possible in a fair and equitable way (no deductions, no exemptions, no political paybacks termed “Economic incentives” and, therefore, no need for tax police of the citizenry and business in general – no IRS as we know it).  (2)In 2012 it should be efficiently collected in an unbiased, automated system at very low cost and no effort from the economy/taxpayer to comply or assist collection.  (3) Be naturally progressive based on “use” of the economy and financial machinery of the nation.  (4) of a very low rate below causing no impact on “typical/ordinary” consumer transactions.

2. You can’t divorce the “paying for” from the “getting”, or soon you get what we got (massive and uncontrolled deficits.)  Deficit spending cannot be allowed to continue as a geometric series or eventually it will destroy anyone who does it (governments or individuals.)  The MMT crooners are wrong in this regard. 


3. You do not want a tax system that distorts the economy, in the general sense.  Taxing incomes does, especially if you allow deductions for debt carrying costs (e.g. interest) as you then favor debt over equity and capital formation.  This is where the APT problem is too — it is destructive to velocity, but velocity isn’t good or bad, it’s neutral.  Trashing it will force nasty side effects that I cannot quantify accurately but any time you distort something you really ought to know why you’re doing it and target the action to achieve some goal along with being able to model the side effects or you’re asking to get it in the ass unexpectedly.

BILL HERMANN: I believe APT will be have a very positive effect on GENERAL money velocity creating larger amounts of disposable income that will drive the economy forward with a momentum otherwise possible to obtain in our current “box” of options.  One CANNOT only focus on the markets having a small burden attached — sure Wall Street will squeal BUT are they the dog that wags the economy, business and our lives — they would like to say they are and that’s the problem, WE BELIEVE IT AND LET THEM ACT IT OUT — no they are the tail and the general popular economy is the engine that maintains their jobs and bonuses.  When the “markets” and “foreigners” see the tremendous benefits to the individual and business, funds will flood into the markets and the tiny tax will hardLY prevent that tsunami of greed that will be the result.  Indeed, the powers that are want to maintain the status quo and the minions in their place — why do we believe their lies?  Are we as dumb as they think we are?   So before throwing out such an advantageous idea on a guess let us accept it as a “glass half full” and do a prospective study — all collections are by computer anyway so true simulation is possible — granted with the exception for the key component of the human behavior element.

4. Taxing consumption puts the impact directly and rateably on the economy where it belongs, on consumption (which ultimately is what drives all economies.)  This means that the impact scales both with economic progress and also aligns government interest with that of the people (grow the economy if you want to grow government.)  It leaves capital formation alone and removes the perverse current incentives for debt over equity, which is a positive change.

BILL HERMANN: Agreed — APT is a consumption tax that will tax goods at retail 0.35% rather than 30%.  Did I hear you respond with the Fair Tax favorite retort the “cascade effect” from taxing intermediate goods? — that is a false/empty argument I will not lay out here but urge you to visit  www.apttax.com/faq.php where there are answers to the questions and arguments I routinely receive from Fair Tax advocates.

The Fair Tax is not perfect, but I’ve yet to see a proposal I like better.

BILL HERMANN www.apttax.com and www.thetransactiontax.org.

See more of him at MarketTicker.org.


The bottom line is that for me to support a tax system it must comply with two fundamental truths:

1. The cost of government must be fully exposed to every beneficiary in the economy.  The beneficiaries are all people.  Companies are owned by and worked at by people.  A corporation is simply the agglomeration of people into a cohesive thing.  Any tax system that forces every consumer to see the cost of government passes this test.  Any tax system that attempts to hide the cost of government by obscuring the expense in the everyday life of the people fails this test.  The current system fails this test in the main through obfuscation that has occurred over time while the APT fails it by design and the promoters are in fact championing that intentional failure.

2. The tax system should (1) be difficult to game or evade and (2) be broad and fall equally on all who are similarly situated.  APT is trivially easy to game by moving financial transactions beyond its reach.  The Fair Tax is difficult to game as all consumption of new goods and services that occurs in the US is subject to it.  The APT requires anyone who engages in a financial transaction to be a reporter to the government and to lay and collect said tax.  The Fair Tax requires only the sellers of good and services at retail to lay and collect said tax.

There are all other sorts of side effects of the APT that I suspect are actually intentional in its design. If they’re not then the people who came up with it aren’t very bright, and that’s an accusation I’m unwilling to make.  As such I must consider these impacts part of the APT’s intended set of goals, albeit undisclosed goals, which leads me to question the honesty of the designers.

Among those “unintended” consequences the APT would instantaneously destroy the futures markets.  While these are indeed used for speculation that is not their only purpose; they are also used for hedging which is an essential function that dates back centuries.  0.35% of a $50,000 (base value, approximately) /ES futures contract is $175.  The margin required to trade that contract is $5,000 (at present) and the trading cost at present is about $2.  Imposition of the APT would instantaneously collapse the futures markets by making the cost of such a transaction rise by 8,700% overnight.

Futures markets predate the United States (by quite a bit); they were used by spice merchants among others.  Destroying this price discovering and leveling function would be extraordinarily destructive; you would not be able to buy an airline ticket for more than a few weeks in advance, for example, nor a cruise ticket for next year, nor could you source steel for your plant a year in advance, etc.  The impact on price stability of such a change would be immediate and insanely destructive.

I find the APT fatally flawed and there is no change that can be made to it, or any system of similar design, that I will support.  If this system is inherent in what you’re backing then I must respectfully decline to participate in what you’re trying to put together and in fact must and will stand in strident opposition.


These are “beliefs” as much as mine are.  I will never succeed with such an approach.

For example, the tax on the futures market is on the $5k not the $50k and would amount to $17.50 sure not $2 but THERE ARE NO OTHER TAXES.  When the capital gain happens that 0.35% might look good compared to the regular income rate on short term gains.  The futures and other markets are important BUT they do not rule the economy –  they follow it’s progress.  We cannot kowtow to the markets when there are so many benefits for individuals and business.  Can we approach the subject with a “half full” attitude?

The Fair tax is so flawed I don’t even want to start.  It is a hiding place for politicians who need a position on tax reform that is assured NOT to happen.

Just to type that my statements are false does not make them so.  This is not a collegial discussion. BYE

Robert Steele

ROBERT STEELE:  On balance, while respecting Karl’s views and wanting his voice present at all future discussions, my view is that the APT Tax comes through this exchange without severe diminishment as the right way to go.  I particularly dislike “futures” markets as speculative, and I particularly like the assurance that the APT Tax will impact on all stock and currency transactions.