Comment: I am a retired business man . Despite the trade-off talk in the beltway, I believe we need neither more taxes, nor less benefits, nor increased borrowing to support the necessary and legitimate functions of government -- we need more productivity. We need then a tax reform that will release productivity, not stifle it under the guise of social engineering, a taxation reform that will release entrepreneurship not stifle it under the guise of regulating it for social welfare. But when it comes to application, timidity and lack of imagination are the order of the day, tinkering at the margins and calling it reform. The slightly better-- not hard since the tax system is so corrupt and unfair-- becomes the enemy of significant reform; reform for a new birth of productivity. If we look at the stated goals of the panel, one solution cries out above all th second bests. * Simplify Federal tax laws to reduce the costs and administrative burdens of compliance with such laws; Unblike the so caled flat tax, a consumption tax such as proposed in HR 25, is inherently simple: it eliminates filing for individuals and for businesses, except for the sales tax -- with a system already in place for state taxes in many places . By contrast, the so-called flat tax continues the confiscatory withholding system -- something that per se would undoubtedly horrify most of the writers of the Constitution.-- and still requires individuals to track expenses and file forms, it still requires businesses, and this is especially costly and onerous to small businesses, to record expenses and to provide contingencies and expenses for audits. The forms may be simpler than the current system of many thousands of pages of regulations, too complex for even the IRS to keep track of; that is to say very little indeed What if the bill proposed to institute the consumption tax were passed? In the Wall Street Journal , Lawrence Koltikoff, Chairman of Boston University's Economics Department sums up some conclusions bout the consumption tax. Assume H.R. 25 becomes law. Overnight, people would move from paying, to the feds and states, roughly 50 cents per dollar earned on their supplies of labor and capital to roughly 30 cents. Because the relationship between tax rates and economic distortions is non-linear, this would reduce the excess burden of our tax system by roughly two-thirds! A very conservative estimate of this annual saving is 2% of GDP or about $250 billion for the coming year. Add in the aforementioned $250 billion in wasteful tax compliance, and we're talking big bucks. * promote long-run economic growth and job creation, and better encourage work effort, saving, and investment, so as to strengthen the competitiveness of the United States in the global marketplace. By repealing the anti-productivity taxes on incomes and success, and the 16th amendment to the Constitution that gave them legitimacy and replacing them with a tax on consumption or transactions, a tax of choice, not compulsion we could at one stroke simplify the code and unleash such a fount of productivity as to make reform of the rest of an antiquated system, including social security, possiblible WITHOUT cutting benefits or raising taxes. 1) It is progressive, with exemptions for food and medicine, who would make the most taxable transactions? The wealthy. 2) It is fair capturing revenues from underground economic activity that currently evades taxation by going unreported and uncollected. Barrons http://online.barrons.com/article/SB110445261525213540.html reports that this underground economy in the US is "about $970 billion, or nearly 9% of the real economy. It should soon pass $1 trillion." Only a consumption tax can capture a fair tax from this underground economy. Taxes lost under the current system, but that would be captured under a consumption tax could virtually wipe out the federal budget deficit. 3) It is less expensive and onerous.than the current system or any version of it lite. A consumption tax not only eliminates the IRS, a onerous and fundamentally un-American agency ( prosecutor-judge-jury all in one ), but the also operating cost of that agency-- more than $10 billion to operate in 2002--- as well as compliance costs to taxpayers of more than $200 billion a year. 4)It already has bipartisan support from legislative sources as diverse as Congressman Chaka Fattah (D-PA) and Congressman Tom Delay (R-TX ). See also this study by Texas Republicans http://www.fairtaxvolunteer.org/news/PR060404.pdf 5) It has the support of economists. http://www.nytimes.com/2005/03/04/politics/04tax.html?th WASHINGTON, March 3 - Alan Greenspan, the Federal Reserve chairman, cautiously endorsed a shift in the nation's tax system on Thursday from one that primarily taxes what people earn to one that taxes what they spend. A ways down, comes this quote from testimony given by Greenspan before the President's Advisory Panel on Tax Reform: "Many economists believe that a consumption tax would be best from the perspective of promoting economic growth - particularly if one were designing a system from scratch - because a consumption tax is likely to favor saving and capital formation," Mr. Greenspan said. Indeed, as Bruce Bartlett points out, ,http://www.townhall.com/columnists/brucebartlett/bb20050112.shtml , it is "a consumption-based tax system, which most economists now support." E.g., Dr. Tom Sowell , http://www.townhall.com/columnists/thomassowell/ts20041125.shtml So too does Professor Walter Williams, http://www.townhall.com/columnists/walterwilliams/ww20041222.shtml Abolition of the IRS and the income tax code it enforces, replaced by a national sales, would create greater economic incentives, enhance personal privacy, and lower tax compliance cost by an estimated 90 percent. In the Wall Street Journal , Lawrence Koltikoff, Chairman of Boston University's Economics Department sums up some conclusions bout the consumption tax. My colleagues and I have been studying income and consumption taxation via computer simulations for some time now. We've found that switching from taxing wage and capital income to taxing consumption can significantly improve economic efficiency and growth. What's more, it can make our tax system much more progressive and generationally equitable. 6) And, it has the support of the voters, who have endorsed it when ever a politician has had the courage to propose such tax reform. vide Novak's list ( http://www.townhall.com/columnists/robertnovak/rn20041111.shtml ) As for the other goal: * share the burdens and benefits of the Federal tax structure in an appropriately progressive manner while recognizing the importance of homeownership and charity in American society, The progressivism of the burden is maintained in a consumption tax by exempting the necessities of life such as food and medicine But, it is inherently progressive, in that it is those who have the most money who normally engage in the largest consumption and who would therefore pay most of the tax. As for homeownership and charity, these are important values, but they were both better promoted BEFORE the income tax made it necessary to bribe people with credits and deductions. There is something fundamentally dishonest in using a revenue system for promotion of such objectives. Reform lite, which is what is assumed by all the public buzz, is certainly a capitulation to special interests and political expediency. But, it is also a scam that perpetuates the core of a new deal redistributionist tax system by a slightly differently skewed system of social engineering. Deductions for mortgage and charity and credits for children are as fundamentally dishonest -- giving back a bit of the money, confiscated by the government for programs and policies that are, in the first place, not the legitimate provenance of the federal government. Such politically appealing scams would be unnecessary if the money were not confiscated in the first place. In addition, it provides a justification for maintaining the whole corrupt system that seeks to buy or reward voters and contributors for continuing or putting a party or politician in power -- it is per se corrupt and no amount of attempted justification of a corrupt system by remitting part of the corruption for good ends such as home owner ship or marriage and family stability can justify the continuation of the corruption. If it is desired to make home ownership easier or to promote family stability, surely the is enough ingenuity in the private sector to satisfy this desire. It should not become the raison d'etre for maintaining an anti-productivity tax system. It is time that the President and Congress muster the courage to oppose the lobbyists and special interests who stand against serious reform of the tax system. If this opportunity is missed, it may not come again in this century. I append a table comparing the various tax systems: A Comparison of FairTax, Income Tax, and Flat Tax Current Law FairTax, H.R. 25 Linder-Peterson Federal Income Tax Pre-2001 Law Armey Flat Tax H.R. 1040 16th Amendment Proposes repeal. No change. No change. Complexity Individuals do not file. Businesses need only to deal with sales tax returns. Very complex; 20,000 pages of regulations; I.R.S. incorrect over half of the time. Withholding continues. Individuals and businesses must still track income and file income tax forms. Home Business Must record all business expenses and is subject to IRS audit? NO! Must record all business expenses and is subject to IRS audit? YES! Must record all business expenses and is subject to IRS audit? YES! Congressional Action 23% Linder/Peterson Fair Tax Act of 2003 (H.R. 25). Employees receive 100% of pay. Social Security and Medicare funded from consumption tax revenue, not your paycheck. (H.J.Res61) - Will repeal the 16th Amendment. Used by lobbyists and the wealthy for tax-breaks and loopholes. Used by bureaucrats for social engineering. Rep. Armey's H.R. 1040 has some problems, but is superior to current law. Cost of Filing No personal forms are filed. Significant cost savings. $225 billion in annual compliance costs.1 Simplified. - costs are somewhat reduced. Economy Un-taxes wages, savings, and investment. Increases productivity. Produces significant economic growth. Taxes savings, labor, investment, and productivity multiple times. Imposes a tax burden some of which is still hidden in the price of goods and services. Equality Taxpayers pay the same rate and control their liability. Tax paid depends on life style. All taxes are rebated on spending up to the poverty level. Current tax code violates principle of equality. Special rates for special circumstances violate original Constitution and are unfair. The flat tax is an improvement over the current income tax, but it is still open to manipulation by special interests. Foreign Companies Foreign companies are forced to compete on even terms with U.S. companies for the first time in over 80 years. Current tax code places unfair tax burden on U.S. exports and fails to neutralize tax advantages for imports. Taxes U.S. exported goods, but not foreign imports to the U.S., creating unfair competition for U.S. manufacturers and businesses. Government Intrusion As the Founding Fathers intended, the FairTax does not directly tax individuals. Current tax code requires massive files, dossiers, audits, and collection activities. A flat tax still requires personal files, dossiers, audits, and collection activities. History 45 states now use a retail sales tax. The 1913 income tax has evolved into an antiquated, unenforceable morass, with annual tax returns long enough to circle Earth 28 times. A flat tax just won't stay flat. Starting out nearly flat in 1913, the income tax grew out of control with top rates over 90% until Kennedy administration. Interest Rates Reduces rates by an estimated 25-35 percent. Savings and investment increase. Pushes rates up. Biased against savings and investment. Reduces rates 25-35 percent. Neutral toward savings and investment. Investment Increases investment by U.S. citizens, attracts foreign investment. Biased against savings and investment. Neutral toward savings and investment. IRS Abolished! Retained. Retained. Reduced role. Jobs Makes U.S. manufacturers more competitive against overseas companies. Escalates creation of jobs by attracting foreign investment and reducing tax bias against savings and investment. Hurts U.S. companies and decreases available jobs. Payroll tax a direct tax on labor. Positive impact on jobs. Does not repeal payroll tax on jobs. Man-hours required for compliance Zero hours for individuals. Greatly reduced hours for businesses. Over 5.4 billion hours per year. Reduced. Non-filers Reduced tax rates and fewer filers will increase compliance. High tax rates, unfairness and high complexity harm compliance Reduced tax rates and improved simplicity will improve compliance. Personal and Corporate Income Taxes Both are abolished. Retained. Retained in a different form. Productivity Increases. Inhibits productivity. Increases. Savings Increases savings. Decreases savings. Increases savings. Visibility The FairTax is highly visible and easy to understand. No tax is withheld from paychecks. The current tax code is hidden, embedded in prices, complex, and incomprehensible. Taxes are withheld from paychecks. Business component of flat tax and payroll taxes are hidden. Would be embedded in prices. Taxes withheld from paychecks. [1] Testimony by the Arthur Hall, Tax Foundation and before the House Ways and Means Committee, 1998. |