Since its first meeting in February, the president's Advisory Panel on Federal Tax Reform has heard testimony and statements from more than 80 witnesses, and examined everything from the philosophical underpinnings and history of our current tax system, to the economic impact of potential tax systems.
A recent two-day meeting heard testimony from 25 witnesses, and examined the merits of the value-added tax, the consumed-income tax, a retail sales tax, the flat tax, reform of the existing code and alternative reform proposals.
The advantages of VAT, the value-added tax, were explained by Yale Law School professor Michael J. Graetz. Under his proposal, a broad-based VAT would replace the revenues lost by eliminating the income tax for most taxpayers.
The tax would be made visible, according to Graetz, by requiring the total amount of VAT to be separately stated wherever goods and services are sold, so that consumers are aware of the price of government. Businesses with less than $100,000 in gross receipts - about 80 percent of the 25 million small businesses in the U.S. - would be exempt from collecting VAT or filing returns.
Instead of repealing the alternative minimum tax, he would repeal the regular income tax. The AMT exemption would be increased to $100,000 for married couples ($50,000 for singles), and the AMT rate would be lowered to a flat 25 percent with appropriate deductions for income-producing activities.
The payoff under this, said Graetz, is an easily enforceable tax that minimizes economic distortions and costs one-third to one-quarter of the compliance costs of our present system.
Chris Edwards, director of tax policy studies for the Cato Institute, proposed a dual-rate tax, with individual income tax rates set at 15 percent and 27 percent, and a corporate income tax at 15 percent. The top rate would begin at $90,000 for singles and $189,000 for married taxpayers. This rate structure would integrate with the federal payroll tax to create a roughly consistent marginal tax rate on earnings at all income levels. Nearly all individual deductions and credits would be eliminated, and all taxpayers would take the standard deduction. The earned-income tax credit would be retained for lower earners.
The plan, although greatly reducing the complexity of the present system, is still more complex than the various flat-rate proposals, acknowledged Edwards. However, the proposal is revenue neutral, and probably more politically viable than some of the more extreme plans offered.
Former House majority leader Dick Armey, currently co-chairman of Freedom Works, an economic reform organization, noted that a national sales tax should not be introduced unless the Sixteenth Amendment of the Constitution is repealed.
Otherwise, Armey cautioned, we could end up with European-level taxation with both an income and a sales tax.
Both Armey and former presidential contender Steve Forbes, president and chief executive of publishing empire Forbes Inc., advocated the flat tax.
The flat tax would be "liberating in its simplicity," Armey said, and he would start by scrapping the current code. All income - business and individual - would be taxed only once and at one rate. A personal exemption would be granted so that every family could cover their expenses before paying the government.
All deductions and credits are eliminated under the Armey plan. There would be no breaks for special interests or tax shelters or tax tables or depreciation schedules, and all Americans would be treated equally, according to Armey.
The yearly total of eight billion pages of forms from the IRS would be eliminated, and replaced with one post card per taxpayer. "Income minus the personal exemption times the rate equals tax liability - that's it," said Armey.
"The problem with any flat tax plan is there is no inherent impediment to congressional tinkering and special interest lobbying," said Thomas A. Wright, executive director of Americans for Fair Taxation. "There never has been and there never will be, to say nothing of the fact that there's absolutely no support for a flat tax in the grass roots. No respectable Democrat would ever vote for one - the only support for it is inside the Beltway."
Striving for fairness
Wright is an advocate of a national retail sales tax. Under his proposal, the tax would be administered through existing state sales tax operations. Retailers who collect the tax would receive one-quarter of 1 percent for their efforts.
Wright said that his proposal, the FairTax, is revenue neutral at a rate of 23 percent. Under the plan, a "prebate," based on the poverty level determined by the Department of Heath and Human Services, would be mailed monthly to all Social Security cardholders who are U.S. residents, to ensure that no one pays any federal tax up to and beyond the poverty level.
The FairTax, he said, is progressive, because it taxes consumption - the best measure of one's ability to pay. The tax would encourage compliance via transparency and simplicity. In addition, the lowest marginal tax rate means there would be less incentive to cheat, he said.
"We are the only group with over a decade of work studying different simplification proposals," Wright said. "We spent $22 million on independent academic research and marketing studies of the American people. The FairTax proposal was not written in some academic office at some university based on the conjecture of a single academic, and it wasn't written in some dark office in the Longworth House office building by a couple of legislative interns."
"We have close to 600,000 grass roots supporters," he said.
Wright said that an alternate sales tax plan, the Broad Economic Simplification Tax Plan, or "Best" tax, is a step in the right direction. The Best Plan, explained David R. Burton, a partner at the Argus Group and senior fellow at the Free Enterprise Fund, includes a business transfer tax in addition to a national sales tax.
The business transfer tax component would tax gross receipts from the sale of goods and services, while allowing businesses to deduct the cost of purchasing goods and services from other businesses; capital investment would therefore be expensed. Gross receipts from export sales would be excluded from the taxable, and a "border adjustment" would be imposed on imports.
"It's a hybrid of the FairTax with a business transfer tax on the corporate side," said Wright. "The problem is that it continues to hide half the cost of the federal government, so it doesn't meet the test of ultimate transparency. No business in the history of the world has ever paid any tax. They collect and they remit. Only people pay taxes - any form of tax other than a direct tax on the consumer is a form of obfuscation."
"Alexander Hamilton said it two centuries ago: If the system is going to be transparent, then it should only tax consumers," he continued. "Then the consumers know exactly how much government costs them. If they're happy with the services they get, they will gladly pay the toll."
Although the FairTax would mark the end of tax compliance, Wright said that, overall, it would be good for accountants. "Businesses would be able to make all their decisions based on what is good for their shareholders, their employees and their customers. It would create real, useful work for the accountants of America in a booming business economy, rather than the make-work of tax compliance."
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