It’s Time To Choose Fundamental Tax Reform

(Photo: Mark Wilson/Getty Images)

John Linder Former Congressman
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Seldom in a lifetime does circumstance collide with opportunity to provide such an occasion for fundamental change. We are in one of those times.

President Trump’s first days in office remind us that his campaign was, first and foremost, about jobs. His argument against NAFTA and TPP was about jobs. His tax reform proposal is to make business more competitive in a global economy to create more jobs. His meetings this week with labor and management put an exclamation point on … jobs.

The House proposes a 20 percent top rate on businesses. President Trump’s proposal is 15 percent. Both are a result of a broken measuring stick wielded by a broken CBO. Neither is real.

As luck would have it, there is a fundamental tax reform proposal in Congress that confronts this issue directly and forcefully. The FairTax Act (HB 25) recognizes what most Americans know. Businesses do not pay taxes, they merely collect them from the consumer and remit them to the government. That is, of course, after a handling fee. A study done 20 years ago concluded that it costs a small business $724 to collect and remit $100.

The FairTax eliminates business taxes; and income taxes, payroll taxes, gift and estate taxes and capital gains taxes. All gone. They would be replaced by a retail sales tax on new goods and services purchased for personal consumption.

Currently, on average the government gets 30 cents out of every dollar earned. (Average income tax 15 percent plus 15 percent payroll tax. Yes that money that the boss pays on our behalf is our money too.) Under the FairTax the taxman gets 23 cents out of every dollar spent. What is not spent will not be taxed.

The tax will be collected by the states. The IRS, the most feared agency of our government, will be gone for good.

Today imports come to our shore with no tax burden. Our exports, on the other hand, are burdened by income taxes, payroll taxes and accountants and attorneys to avoid the taxes. For example; it takes hundreds of companies to put a loaf of bread on your table; ore miners for the steel for the tractors, oil drillers for the fuel, flour makers and, yes, farmers. Each has tax costs that are embedded in the price along the way. The tax component in the price system is estimated to be above 20 percent. Eliminating the tax code and getting rid of the embedded cost of the IRS will make us dramatically more competitive in the global economy.

It will also attract manufacturing back to our nation.

When Bill Archer was chairman of the Ways and Means Committee, he often quoted an informal study of 500 international corporations that had been asked: What would you do in your long-term planning if the U. S. eliminated all taxes on capital and labor and taxed only personal consumption? Eighty percent said they would build their next plant in the United States.

And, frankly, if you’re selling to the auto industry in Michigan you would rather be in Michigan to reduce transportation costs. But because of the tax component in the price system, many are not.

Additionally, the FairTax puts an effective 23 percent tariff on all imports by taxing them at retail and making them pay exactly the same as domestic products pay for government. And it would be accomplished with zero bureaucrats writing rules to reach the mythic goal of “border adjustability.”

We finally have in our cabinet people who have signed the front of a payroll check as well as the back. They understand the opportunity cost of 75,000 pages of tax code. It is not quantifiable, but it is huge.

What is quantifiable is the cost of complying with that code. In 2014 the Mercatus Center of George Mason University concluded that those costs approach a trillion dollars annually. That is not just inefficient. That is stupid. It’s like paying for a dead horse. You get nothing in return.

There has been much conversation over the last year about the trillions of dollars in offshore financial centers. A Forbes analysis a few years ago put the figure in excess of $20 trillion.

The political debate over this issue tends to devolve down to ideology and cupidity. But corporations are formed to produce jobs, goods or services and shareholder value, not government revenues. If it adds to shareholder value to leave money in the nation in which it is earned that is a matter of corporate governance.

Politicians unhappy with this arrangement should eliminate the punitive tax policy that keeps it offshore rather than whining about fairness. The FairTax eliminates this discussion entirely. I once asked Alan Greenspan how long it would take for that money to find its way into our banks and markets if we replaced the income tax with a consumption tax. He said, “Months.”

Eventually the argument against the FairTax becomes; consumption taxes hurt the poor. Neal Boortz and I wrote a book a dozen years ago just to put that notion to bed. (You can still find it. “The FairTax Book”)

Today, we lose at least 20 percent of our purchasing power to the embedded cost of the IRS impacting those at the bottom rung of the ladder the hardest.

Each year our government determines what it would cost a given sized family to pay for necessities. Under the FairTax every household, depending on the size of the household, will get a distribution at the beginning of each month to rebate the tax consequences of spending at that level. Thus, the poorest will pay no taxes at all. With the FairTax a family of four could spend about $32,000 before paying any taxes.

President Trump says routinely that he wants to put the American people back in charge. Under the FairTax we will each determine our own tax burden by paying as much as we choose, when we choose, by how we choose to spend.

The argument will be made that this is a boon to the wealthy. That ignores the fact that we’ve never really taxed wealth in America. We tax wages. The first thing that wealthy people arrange in their lives it to stop receiving wages and live on categories of income favored by the tax code. But they all spend.

I assure you that Bill Gates gets no joy out of looking at his bank account. He gets his joy out of spending it. In the last 17 years he and his wife have spent tens of billions of dollars on others. As that money makes its way into the stream of commerce through employees and gifts it will be taxed as it is spent.

The principle opposition to the FairTax comes from K Street, about half of whose denizens make a living gaming the current code. President Trump owes them nothing and is inclined toward boldness. In hopes that he will be bold I offer some thoughts.

First, not one of the proposals being discussed broadens the categories to include the 47 percent who do not pay taxes. You cannot continue to pay for our spending levels on the backs of fewer and fewer taxpayers.

Second, most of the changes being proposed were included in the Reagan reform of 1986. The code has been amended more than 25,000 times since. Future congresses will be incapable of resisting picking winners and losers.

Third, any reform that continues to tax income keeps the most feared and most powerful agency in our government in place. The IRS was successfully weaponized by the Obama administration. It needs to be put out of existence once and for all.

The FairTax broadens the base and lowers the tax rate. Everybody is treated exactly the same. Under the FairTax when Warren Buffett’s wealth is spent — and it will be spent, if not by him, then by his heirs or by foundations – it will be taxed at exactly the same rate as his secretary’s and he will be proud.

Abolishing the IRS and taxing spending rather than income would give us nearly a trillion dollars a year of increased purchasing power and economic stimulus and, more important, it would grant us the greatest gift a free society can give its citizens – anonymity. No agency of government should know more about us than we are willing to tell our children.

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