David L. Kendall is a Professor of Economics & Finance at the University of Virginia's College at Wise.


 

H.R. 25 and S. 1493

U.S. Representative John Linder of Georgia is "...the primary sponsor of the Fair Tax,legislation that will repeal all corporate and individual income taxes, payroll taxes, self-employment taxes, capital gains taxes, estate taxes and gift taxes - and replace it with a revenue-neutral personal consumption tax." Linder says that "the Fair Tax is one of the most exciting proposals to ever reach the American people.  I would encourage everyone to review the Fair Tax, as it is only 132 pages, which stands in stark contrast to the more than 50,000 pages of tax code laws and regulations currently in effect....

The Fair Tax offers long-needed tax relief – in the form of lower prices, nearly nonexistent compliance costs, and the ability to choose how much to spend in taxes – to all Americans, while eliminating the income tax and allowing Americans to keep 100 percent of their paycheck. The Fair Tax will dramatically reduce prices, protect and ensure funding of Social Security and Medicare, empower the low-income earners, and put choice and control back into the hands of every American. All the crucial elements are in place: a public that is eager and ready for a fairer tax system, and a Congress willing to seriously consider genuine tax reform. To be competitive in the next century and to renew the American dream, we must change the way we fund our national government."

Linder believes that the elimination of income taxes now embedded in the prices of goods and services that would accompany the adoption of the Fair Tax Plan would result in a reduction of the cost of goods and services by 20 to 30 percent; thereby preventing the addition of this federal sales tax from increasing what the public has to pay for them. [1]

H.R. 25 calls for the repeal of the 16th amendment to keep Congress from easily reinstating an income tax.

Soon, a national debate will begin over federal tax reform. Congress will likely consider a variety of proposed reform plans, among them H.R. 25 and S. 1493, also known as the "Fair Tax Plan," which calls for replacing the current federal income tax with a national retail sales tax. Many business professionals and economists understand and agree that a progressive national retail sales tax plan offers considerable comparative advantage over an income tax, but not all are familiar with the specific provisions of H.R. 25 and S. 1493.

The main points of the federal tax reform plan proposed by H.R. 25 and S 1493 are:

A wealth of information and details about the Fair Tax Plan and the grass-roots organization, Americans for Fair Taxation, is available at www.fairtax.org. 

The Fair Tax Plan does not call for elimination of federal taxation. Nor does the Fair Tax Plan call for reduced federal spending. The Fair Tax Plan is a "revenue neutral" tax reform proposal that is designed to raise the same federal tax revenue now generated by the federal income tax, payroll withholding taxes, the self-employment tax, inheritance taxes, and capital gains taxes.

If passed and signed into law, the Fair Tax Plan would:

The current federal income tax code is widely regarded by just about everyone as unfair, complex, wasteful, confusing, and costly. Businesses and non-profit organizations spend more than six billion hours each year complying with the federal tax code. Estimated compliance costs conservatively top $225 billion annually---costs that are ultimately embedded in retail prices paid by consumers. These embedded costs put U.S. goods at a distinct price disadvantage in global markets.

Many believe the Internal Revenue Code cannot simply be "fixed," which is amply demonstrated by more than 35 years of attempted tax code reform, each round resulting in yet more complexity and unrelenting, page-after-page, mind-numbing verbiage (now exceeding 54,000 pages containing more than 2.8 million words).

Our nation's current income tax alters businesses decisions in ways that reduce productivity and retard growth of our economy. The federal income tax also alters saving and investment decisions of households, which dramatically reduces the economy's potential for growth and job creation. Worse yet, payroll withholding taxes are clearly regressive, hitting hardest those least able to pay. Simply stated, the complexity and frequently changing rules of the federal tax code make our country less competitive in the global economy and rob the nation of its full potential for economic growth and job creation.

In summary, the benefits of the Fair Tax Plan are compelling. The Fair Tax Plan eliminates the bias against work, saving, and investment caused by taxing income. Eliminating this bias will lead to higher rates of economic growth, greater productivity of labor, rising real wages, more jobs, lower interest rates, and a higher standard of living for the American people.

Many Americans will agree that the Fair Tax Plan should replace the IRS Code, but may also say, "it simply can't be done." But many said the same thing to the grassroots progressives who won women the right to vote, to those who won collective bargaining for union members, and to the Freedom Riders who made civil rights a reality in America.

We must not allow Congress to push aside the Fair Tax Plan simply because it will be difficult to overcome the objections of entrenched special interest groups who benefit from the complexity and tax preferences of the status quo. Passing up the comparative advantages and benefits available for the vast majority of Americans is simply too high a cost to pay.


Footnote

1. Congressman Linder's site on the Web at http://linder.house.gov/index.cfm?Fuseaction=Resources.Home&Resource_id=1 provides this and much additional information about the Fair Tax Plan, including a comparison of the Fair Tax with a Flat Tax.


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