Posted: Apr 28, 2005 By: Dr. Harvey F. Barnard Subject: Comments regarding specific proposals to reform the tax code Comment: I have re-attached this 10 page paper as a Word document in following the guidelines for posting comments on reforming the tax code. Thank you for the opportunity to participate. Dr. Harvey F. Barnard Author of NESARA The NESARA Institute P.O. Box 70 Greenwell Springs, Louisiana 70739 (225) 634-3228 April 23, 2005 TO: President's Advisory Panel on Federal Tax Reform In response to your published request for comprehensive reform of the Tax Code, I offer Part II of NESARA, the National Economic Stabilization And Recover Act. Backed by more than 20 years of study, this proposed legislation exceeds all of your stated requirements. It replaces most of the 8 volumes of fine print in Title 26 which nobody understands with about two dozen pages of simple rules which Forest Gump would understand. NESARA was designed using system theory, the same techniques used to identify and solve complex problems in heavy industry. The stated objectives for its design were: Simplicity, Practicality, Revenue Neutral, Progressive, Constitutional, Politically Doable, and with an efficiency increase of at least 2.5% annually to promote long-run economic growth. The final product, posted at the NESARA Institute’s web site, http://nesara.org/main/index.htm meets or exceeds all of its design objectives. Far beyond comments or suggestions from which to write new or revise existing tax code, NESARA is written as a comprehensive legislative package. It provides an explicitness upon which to judge existing tax code and any proposed changes virtually unknown in Congress or to the general public. Thank you for your kind attention. For the NESARA Institute Organizations and Associations Dr. Harvey F. Barnard Author of NESARA Detailed Summary–Part II National Sales and Use Tax Immediate Relief and Results • Workers maintain better control of their earnings • Production is no longer taxed, just consumption • Most of the necessities of life are not taxed • Encourages production thus revitalizing industry in America • Encourages rebuilding of inner cities • Discourages wasteful uses of natural resources • Exposes the true cost of government • Greatly eliminates the struggle between tax “protesters” and bureaucracy • Allows the “underground” to resurface and become a viable contribution to production of goods and services • Greatly restricts the influence of special interests and lobbyists The Income Tax • The Income Tax Act of 1939 is amended • People need no longer fear the IRS • Billions of hours of nonproductive labor are eliminated • Mounds of paper work are eliminated • The cost of the income tax is no longer hidden and embedded in the cost of doing business and passed down the chain with the consumer paying the final tab • Most likely eliminates state income tax plans because state income taxation piggybacks on federal income taxation • The IRS is reformed into the National Tax Service • Volumes of complicated tax code are history • Eliminates personal income taxes • Eliminates corporate income taxes • Eliminates gift taxes and estate taxes • Eliminates capital gains taxes Sales and Use Tax • Tax rate of 14% • Government entities are exempt • Government mandated expenses such as licenses, permits, passports, are exempt • Sales of bullion, coin and currency are exempt • Sales made by or to nonprofit schools are exempt • Sales of prescription drugs, medical supplies and services are exempt • Real estate rents and leases are exempt • Sales of groceries are exempt • Sales of plants, livestock and fish used in the production of food for human consumption are exempt • Insurance sales are exempt • Segregated portions of labor in retail service contracts are exempt • Incidental or occasional sales such as garage or rummage sales are exempt • Sales for the purposes of recycling are exempt • Meals provided by companies at company expense are exempt • Sales that are nonprofit in nature are exempt Description of Proposal: 1. Tax base NESARA is a consumption based tax, the design most favored by America’s Founding Fathers. It eliminates personal income taxes, corporate income taxes, gift taxes and estate taxes, and capital gains at the Federal level. 2. Exemptions, Deductions, Credits And Exclusions NESARA provides more than 20 classes of items exempted from consumption taxes at the Federal level. Individuals of modest means are protected from the adverse effects of federal taxation by removal of the hidden elements of current tax policies on productive activity and by exempting groceries, rent, insurance, medicines, and some categories of previously used articles from consumption taxes. One of the exemptions is worded somewhat curiously: “Ninety percent of the purchase price paid for all secondary sales of commercial investment securities of whatever type, excluding the transferable securities of the United States government and all its political subdivisions which are exempt from the tax;” When translated it means that secondary sales of securities are taxed at 10 percent of the full sales tax rate. Within the philosophy of a sales tax, taxing secondary stock sales is fair, largely paid by wealthy people just relieved of income and capital gains taxes. The tax is low enough to prevent capital flight from the country and high enough to raise substantial amounts of revenue, something over $500 Billion annually. More importantly, this tax discourages market speculation, the constant moving of money to make money in the short run rather than into long-term productive investments. Long-term investors are largely unaffected by this tax. NESARA distinguishes between initial public offerings and secondary transfers of stock. NESARA encourages new commercial investment because initial issues of stocks and bonds are not subject to the national sales tax, only trades in the secondary market. Initial investments build businesses; secondary trades merely swap ownership. Stock certificates are property and proof of company ownership. Whereas initial stock purchases capitalize a new venture, secondary exchanges are really nothing more than property sales in the commercial retail market and thus subject to any sales tax. 3. Tax Rate(S) NESARA imposes a national sales and use tax of 14 percent on the retail sale or use of all property, both domestic and foreign, exchanged in commerce by any person within the jurisdiction of the United States. The first requirement of this tax is that it replaces dollar for dollar all revenue lost with the demise of the income tax. Congress must set the actual tax rate, 14 percent being a judicious suggestion based on computer simulations of the national economy. With the anticipated increase in economic productivity and tender hopes for prudent government, that initial rate drops. After a few years one estimate puts it as low as 7 percent, others at around 9 percent. All estimates are established on various assumptions for many factors. Experts argue over the validity of their assumptions and the impacts of numerous factors in their economic models. Most agree on one thing — the size of a uniform tax rate generating a given amount of revenue depends on the volume of taxable sales. Other tax rates for special cases are explicitly stated in NESARA. For example, it imposes a tax of 8 percent on the gross profits of gaming sponsors, that is, 8 percent of gross gaming receipts less total gaming payoffs to chance purchasers and government entities. And it encourage recycling materials. This justifies a 50 percent tax break on retail sales of used tangible property—used cars or equipment, parts acquired at scrap yards, merchandise from secondhand stores, etc. — excluding remanufactured items sold with warranties longer than 90 days. The latter are treated as new items and taxed at the full rate. 4. Distribution Of The Tax Burden Contrary to popularly held belief, the “progressive” income tax is actually regressive because it is often easily passed through as a hidden tax in the price of goods and services. It falls most heavily and unfairly on working middleclass citizens who pay the tax twice, once when it is withheld from their wages and again as a hidden tax in the price of essential goods and services. Exempting most of the necessities of life from the Federal consumption tax destroys the misconception that a national retail sales tax is always regressive, that it falls hardest on those who must spend most of the money they earn out of necessity, not choice. Discrediting that myth destroys the moral justification for the current income tax system. Consider the fabled poor family of four. At a minimum wage of $5.15/hour, two full-time wage earners provide an annual income of $21,424, (2 workers x $5.15/hour x 40 hours/week x 52 weeks/year = $21,424). Of course, this family will be affected by the new federal retail sales and use tax. If 90% of the family’s income is spent on necessities — nontaxable items, a reasonable figure for a poor family, the taxes actually paid becomes 14% of the remainder, or $299.94 ($21,424 x 10% x 14%). When spending money for necessities a poor family pays directly for the goods and services received, and pays indirectly all of the hidden embedded costs of the income tax. Assuming the national sales tax system is a mere 2.5% more efficient than the current income tax system (a conservative estimate), this family will avoid an additional $535.60 of hidden embedded taxes (2.5% x $21,424), providing an annual net savings of $235.66 per year ($535.60– $299.94). 5. Treatment Of Charitable Giving NESARA abolishes some tax policies that stimulated contributions to charitable organizations. It restores some of that loss by issuing Credit Certificates applicable to national sales and use tax liabilities for donations to qualified organizations. To obtain the certificates, worth 10 percent of all donations valued at $250 or more, the organization must be recognized and approved by the National Tax Service. It must also apply for each Credit Certificate in the donor’s name and certify the contribution. The Credit Certificates can be sold in commerce and will be accepted by the government for tax payments at full face value. 6. Treatment Of Home Ownership Real estate sales are taxable but credit is allowed for taxes paid on previous retail transactions or for taxes that would have been paid had NESARA been in force. A home purchased for $100,000 several years ago and sold for $150,000 after NESARA becomes law has a $50,000 taxable base. If it sold for less than $100,000 no national sales tax would be due. For purposes of establishing an initial taxable base, transactions in progress when the Act becomes law may be considered as completed. Under NESARA, new real estate developments suddenly become more expensive, older properties more valuable. This inevitably slows the mad dash to abandon existing property. A new $200,000 suburban home carries a $28,000 national sales tax burden. Many people could achieve the same increase in standard of living, spend less money and avoid most of these taxes by playing This Old House with an older property. The net effect revitalizes inner cities and older neighborhoods at little or no cost to the government. In fact, federal, state and local governments all collect revenue from these activities while avoiding the expense of supporting new expansion projects. Taxpayers win by spending less, avoiding some sales tax, but also with lower property taxes due to more efficient use of the existing infrastructure. 7. Collection Method The liability for payment of the national sales and use tax attaches to every purchaser and for its collection and remittance to every seller. The mere act of initiating a taxable sale in commerce within the jurisdiction of the United States makes one an agent for the National Tax Service. There are no forms to fill out or sign, no coupons to clip or box tops to send in. Getting into this game is ridiculously easy. To get out, remit the tax due in full at any authorized federal depository on or before the tenth day of the month following the month in which the taxable sale was made and do not initiate any more taxable sales. Keep the receipt. That piece of paperwork is all that is necessary to prove the seller’s liability was discharged. The same holds true for the purchaser’s receipt from the seller. Obviously, the tax bureaucrats will insist on standard forms and taxpayer identification numbers. But these items are only for the convenience of maintaining auditable records. They have nothing at all to do with establishing or discharging one’s liability under the law. The burden of proving that liability falls on the National Tax Service. 8. Treatment Of Businesses There are no limits to the number of times a particular article may be subject to the national sales or use tax if it returns to the stream of commerce. Each time the purchaser must pay and the seller must collect and remit the tax unless the sale is exempt. But taxes are collected at the retail, end or final transaction and not from wholesalers, or from intermediate sales of items directly used for or incorporated into the manufacture of a product to be ultimately sold at retail. Maintenance tools and office supplies purchased by a chemical manufacturer are taxable even if bought from a recognized wholesale dealer. Pipe, valves, pumps, catalyst and solvents directly used in its processes to make chemicals are exempt. Electric power to its office buildings or to run its pumps is taxable but power used directly in its industrial processes, such as electroplating and metals refining, is exempt. Should a dispute occur between the purchaser and seller about whether any particular sale is exempt from the tax, the purchaser must pay it. The law provides ways to challenge that collection and, if successful, to get the money back plus interest. Excess taxes inadvertently collected must be remitted to the National Tax Service when not refundable. Summary documentation, also called returns or reports, of the seller’s monthly tax remittances may be voluntarily submitted to the National Tax Service. If timely, meaning within five working days after the tax due date, the seller may deduct 1 percent of their tax deposit to offset expenses for collection and keeping records. If everyone files, sellers will divide $6 billion annually. What at first seems like a lot of money comes to only $600 per year when split equally among 10 million sellers. Of course the big companies get most of it but they also do most of the work. 9. Transition, Tradeoffs and Special Issues NESARA provides compensation for tax policy changes to recipients of fixed income payments from the federal government and prevents double compensation for high income recipients with full Cost of Living Adjustments (COLA) protection. Timing, limitations and funding for the transition are explicitly specified in NESARA. 10. Enforcement Occasions of negligence or refusal to pay, collect or remit the national sales and use tax as required by law. Conflicts will arise but should be minimal. Sellers have little reason not to collect the tax: A lawful statute, clearly worded and easily understood, requires that they collect it; Uniform taxes do not unduly affect their competitive position; They are not the ones paying the tax; and the government compensates them, at least in part, for obeying the law. Purchasers refusing to pay the tax are unlikely to obtain goods and services from sellers. No sale, no problem with the law. Simple procedures handle the difficulties that do occur. Each step taken by the National Tax Service is explicitly marked by the title of the notification document: Assessment / Preliminary Notice of Deficiency, Preliminary Determination, Final Notice of Deficiency, Final Determination, and Notice of Levy. One or more remedies are available at every stage for an alleged delinquent taxpayer to challenge the government’s assertion. Upon receiving either a Final Notice of Deficiency or a Final Determination, one may bypass the National Tax Service, placing the argument before a court of competent jurisdiction. The stakes get higher. Win, even partially, and the government must pay your legal fees plus twice the amount of tax relief ordered by the court. Lose and the court may order you to pay its costs and all legal fees in addition to the tax, penalties and interest. A Notice of Levy cannot be issued more than two years after the date on which a tax was payable or due and it automatically expires three years after the tax due date. During that period the National Tax Service may agree to an Offer in Compromise in partial settlement of taxes due or by mutual agreement extend the limitation period in hopes that the taxpayer might acquire the money and pay the debt. To avoid the many problems associated with collections under the current income tax system, NESARA clearly defines that a warrant of distraint be issued before continuing with any seizure. Additionally, because the national sales and use tax is collected only in activities of commerce, real and personal property is exempt from seizure and collections. Innocent third party owners of property are also protected, eliminating some of the repulsion with current asset forfeiture laws. The government prefers to obtain something for taxes due rather than nothing. It is one thing to drill for oil, quite a different matter when you know it will be a duster. Revenuers cannot use the remedies of garnishment against a delinquent taxpayer while the taxpayer can declare bankruptcy any time. Better for everyone to make the best of a bad situation, reach a compromise settlement if possible and move on. NESARA defines four federal tax crimes and specifies the punishment for convicted offenders. A seller who misrepresents or hides the national sales tax attempts to gain unfair competitive advantage or to defeat its visibility, a misdemeanor. Knowingly participating in a taxable transaction and willfully evading responsibility to pay, collect or remit the tax may be a misdemeanor or a felony depending on the amount of money involved. If the amount is over $100 but less than $1,000, the crime is a misdemeanor punishable by a fine of not more than $1,000 or a term of imprisonment of not more than six months, or both. For amounts over $1,000 the crime is a felony punishable by a fine of not more than $5,000 or a term of imprisonment of not more than two years, or both. Making or conspiring to make fraudulent use of a Certificate of National Sales and Use Tax Exemption is a felony. Conviction may subject you to either a fine of not more than $5,000 or a term of imprisonment of not more than two years, or both. Summary The most important action Congress can take to put America on the road to recovery is to replace the federal income tax with a uniform excise tax on consumption. Part II of NESARA provides the framework, the final numbers currently expressed in the proposed legislation to be inserted by Congress. That said, it should be noted that Part I of NESARA which addresses Monterey Policy reform is specifically designed to work hand-in-hand with Part II. Working together, they generate far more benefits than either taken alone. NESARA will double the standard of living for all Americans in just 20 years and at negative cost. We are doing most of the damage to ourselves and it costs us nothing to stop doing stupid things. The NESARA Institute is happy to be able to offer hundreds of pages of detailed research on these subjects at our nesara.org web site. More than 10,000 people visited our site in March, several hundred from various government agencies. In addition, the NESARA Institute is currently releasing a book on the subject entitled Draining the Swamp for those who dislike sitting in front of a computer monitor for hours on end. Upon your request, we would like to offer a copy, free of charge, to each member of the President's Advisory Panel on Federal Tax Reform. If you accept this offer, have someone call (225) 634-3228 or contact us through the nesara.org web site to specify the number of copies needed and a shipping address. After 20 years of studying these subjects I feel obligated to thank you for your endeavors in solving such thorny problems and wish you the best of success.