Wednesday, August 15, 2001

I read with great interest your recent editorial entitled, "Where's the vision in Washington?" I, too, believe that it is time for Washington to stop putting Band-Aids on our fundamentally flawed tax system and start anew with a fairer, simpler code.

If Congress had planned a tax code in 1912 that was destructive of capital formation, punitive against work and savings, and incomprehensible to the very government employees charged with the responsibility of enforcing it, they could not have done a better job than what we ultimately achieved. They also would have been laughed out of town.

The code must go! The hidden costs it imposes on consumers must end! The appearance created that some taxpayers are more worthy of tax breaks and credits must stop!

Over the past several years there have been three major proposals put forth to reform the tax system. Any of them would be an improvement over what we currently are burdened with. I, however, believe that the FairTax, which Collin Peterson and I introduced again July 17, is superior to the two others.

The FairTax would abolish all taxes on income. Gone are the personal and corporate income tax, the capital gains tax, the gift tax, the estate tax, the self-employment tax and finally the payroll tax, which is the greatest tax that 75 percent of us pay, as well as the most regressive.

In their place, the FairTax would levy a single-rate, federal consumption tax collected only once, at the final point of purchase for personal consumption. And the FairTax abolishes the IRS, which would allow us to pass on an estimated $225 billion annual savings which Americans currently spend in complying with the code.

In order to avoid burdening the poor, the FairTax provides a monthly rebate to every household to totally remove the tax consequences of spending on essentials. This number is determined each year by the Department of Health and Human Services and is defined as poverty level spending. In other words, we totally untax the poor!

Americans for Fair Taxation has spent over $18 million over the past five years on market and economic research to determine what is the fairest and most efficient way to raise the necessary funds to replace the current revenues raised by the tax on incomes. One research project, completed at Harvard, argues that, on average, 22 percent of what you pay for at retail is the imbedded cost of the current code. That is to say if you spend $1 at the store, 22 cents is the tax component of your purchase.

This should not have been surprising. I have owned several businesses and never did I discover a secret drawer in which money piled up for me to pay my income tax, the corporate portion of my employees' payroll taxes or my accountants and attorneys to avoid the tax. All of that came out of price, along with all of the costs the businesses incurred.

Ultimately, the only taxpayers in the world are consumers who consume the product and all of the costs imbedded therein. By abolishing the IRS we eliminate the tax component of our price system. Competition will drive those costs out of the system and we replace them with a 23 percent transparent tax imbedded in the retail price, but you get to take home your entire gross pay.

How will this impact our economy? Imagine selling goods and services into the global economy 22 percent cheaper while making the same profit. Imagine foreign products meeting our shores and being taxed the same as domestic production at retail. Imagine all of the world's investors in our equity markets because there are no tax consequences. What would happen to interest rates if American companies could repatriate all of their profits that are stranded overseas because the tax burden to bring them home is 35 percent?

The passage of the FairTax would efficiently tax the underground economy and make every American a voluntary taxpayer. They would pay in taxes in the amount they choose when they choose by how they spend.

The Armey bill is also under serious consideration. It would eliminate all deductions and levy a flat tax on income. The most recent proposal required a 17-percent tax levy. In 1986, we eliminated most deductions and drastically lowered the tax rates to only two levels, the top level being 28 percent. We have amended that reform more than 6,000 times since then.

The tax increases of 1990 and 1993 brought us back to five tax levels and a 39.6 percent top rate. Both increases were sold to the American people with the promise that the increases would only fall on the top 1 percent of income earners. Then we used the complexity of the code to redefine income. This was possible because we still had the code in place and knew who made what income.

The Armey proposal, which also leaves in place a corporate income tax and the payroll tax, would leave the IRS in place. That guarantees three things: 1) The tax rate can easily be increased in subsequent years. (Only on the top 1 percent of the taxpayers, of course.) 2) Seventy-five percent of our citizens, who pay a larger payroll tax than income tax, will not benefit. 3) The tax component of our price system (i.e. the 22-percent embedded cost) will remain.

Last, and very important, the Armey flat tax presumes that we can achieve a huge cut in spending. After watching Congress struggle with the president's proposal to limit spending increases in this year's budget to 4 percent, I think a major cut is unlikely.

The third proposal is the Tauzin bill, which would eliminate personal and corporate income taxes and place in their stead a 15 percent sales tax. It also eliminates many excise taxes. The failings are exactly the same as the Armey bill with the added political hazard associated with passing a measure that would eliminate what some members of Congress consider appropriate "sin" taxes. We would lose many votes on the floor of the House on the proposal to reduce excise taxes on tobacco alone.

In addition, the FairTax is the only proposal that deals with the largest challenge we face over the next few decades. In 30 years, we will increase the numbers of Americans collecting Social Security and Medicare by 100 percent, while increasing the number of workers paying those benefits by only 17 percent. Under both the Armey and Tauzin proposals, irrespective of the president's proposal to allow some private investment of retirement funds, the payroll tax must be increased or the benefits decreased in order to compensate for this funding shortfall.

Under the FairTax, the money for those retirement programs will be collected from the overall size of the economy, which economists tell us will double in size in slightly over a dozen years well before a doubling in revenues is necessary. Also, the FairTax will increase the number of payers into the system. Currently, about 120 million workers pay into the retirement system. Under the FairTax, every citizen as well as 51 million foreign visitors who spent $108 billion in our country last year will contribute.

We have a unique opportunity to change the world for our children and grandchildren. We can use this moment to eliminate a tax system that never should have become so burdensome, complicated and corrosive. We can save our retirement system for future generations. And we can provide the ultimate privilege for free citizens in a free society the privilege of anonymity.

Never again would any agency of government know how much money we make, how we make it or how we spend or invest it. That alone is enough to pass the FairTax!

Rep. John Linder (R-GA)

[Rep. Linder represents Georgia's 11th District, a band of counties stretching from Gwinnett to Athens and the South Carolina line.]

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