Comment: I. Description of Proposal
Thank you for the opportunity to submit comments on the issue of tax reform. I believe the most efficient and fair way to fund the federal government is through “The Fair Tax Plan of 2005” –H.R. 25 and S. 25, as written.
The Fair Tax Plan utilizes a national retail sales tax to raise revenue for the federal government. The plan is designed to replace the current income tax system, as well as eliminate the payroll tax (Social Security/Medicare), the gift tax, estate tax, capital gains tax, and corporate taxes. This revenue-neutral plan closes all loopholes and special considerations. The tax rate necessary to maintain current government spending is 23%. The tax burden is distributed in a more fair way, in that people who spend more money, pay more taxes. Low-income individuals and families are protected through a monthly prebate, which is in the amount of taxes on spending up to the poverty level. This ensures no one pays taxes on the necessities of life.
Under the Fair Tax Plan, charitable giving would certainly not be discouraged, and in fact is likely to increase. It is a myth that people give to charities only to receive tax breaks. The fact of the matter is that people donate money when they believe in the cause and if they can afford it. Even sometimes when they can’t afford it.
More citizens than ever before will enjoy the benefits of home ownership under the Fair Tax. Interest rates are expected to drop by as much as two percentage points, allowing not only new homeowners to benefit, but also enabling existing homeowners to refinance their mortgages, saving huge amounts of money over the long term.
The tax will be collected by the states, if they choose, and will receive just compensation. If they choose not to, they can outsource to other states.
The Fair Tax Plan calls for no tax to be levied on business to business transactions. Also, the cost of complying with the current tax code is virtually eliminated.
II. Impact of Proposal Relative to Current System
A national retail sales tax collected at the point of consumer purchase is a completely transparent tax that everyone can understand. Our current system is a convoluted mess that no one understands. Additionally, consumption is a more stable revenue source than income. If a person loses their job, there is no income, so no tax is paid. However, through borrowing or using savings they continue to consume.
The Fair Tax is the most fair tax plan on the table. Eliminating the ability of lobbyists and special interests to manipulate the tax code is of paramount importance. Giving special favors to some and not others creates a disproportional tax base, with those that can least afford to pay picking up the balance. The Fair Tax also brings to light the falsehood that corporations pay taxes. Corporations simply pass their tax burden along in the form of higher prices or lower wages. Under the current system, it is estimated that 20-25% of the price of goods and services is embedded costs related to tax compliance.
With the implementation of the Fair Tax, the economy is expected to grow an estimated 10.5% in the first year alone. And with the tax component removed from the production of goods and services, U.S. companies would be extremely competitive in the overseas markets. More exports mean more jobs. The United States would become the largest tax haven in the world, with foreign companies flocking here to build factories, as well as U.S. companies abroad bringing their jobs back home.
The approximately $250 billion dollars a year spent on tax compliance is an incredible drain on our economy which we have nothing to show for. Compliance costs are expected to drop by as much as 95% under the Fair Tax, with the added benefit of seeing enormous reductions in administrative costs.
Under the current system, tax evasion is in the range of one-quarter of income taxes collected. This does not include revenue lost on illegal sources of income estimated at $1 trillion a year. The Fair Tax removes the incentive to cheat by removing the main problem, the income tax. And with 90% less filers, the government can better focus on people that are still trying to cheat the system.
III. Transitions, Tradeoffs, and Special Issues
Since 45 states already collect state sales taxes, the transition to a national retail sales tax would be a minimal burden. First, the embedded costs of compliance would be removed from all goods and services, dropping prices an average of 20 to 25%. Then, once the sales tax of 23% is imposed, prices would stabilize to where they were under the income tax system. Replacing our current system with the Fair Tax would also eliminate the anxiety associated with April 15th, and free people from the burdensome task of meticulous record keeping and scrutiny from the federal government.
Obviously, people who make a living knowing and understanding the current tax code would be adversely affected. But a failed tax system cannot be justified to prop up any sector of the economy. Industries come and go, but with the economic prosperity generated by the implementation of the Fair Tax, there will be more opportunities available to displaced workers.
I hope that in your negotiations for tax reform, you can recommend “The Fair Tax Plan of 2005” to President Bush for consideration. It meets all of his criteria for reform and will move us one step closer to a true ownership society. Fairness is due to the American public. Please have the courage to put real tax reform on the table.