A Fair Tax for America

Submitted to the President's Advisory Panel on Federal Tax Reform

April 29, 2005

Mr. Aaron J. Schutte

Sugar Land, TX

<aaronschutte@iglide.net>

Submitted as an Individual

The President's Advisory Panel on Federal Tax Reform

1440 New York Avenue NW

Suite 2100

Washington, D.C. 20220

In Reply to "Requests for Comment \# 2\"

Ladies and Gentlemen:

I have witnessed first-hand the damage our current federal tax structure
has inflicted upon the American economy. From punishing productivity to
forcing business owners and individuals to grapple with a complex tax
code requiring massive amounts of paperwork and professional
interpretation, it has systematically driven businesses overseas and
oppressed the American worker at home.

To ensure America's future economic competitiveness and survival, we
must replace our current system of taxation with the most economically
productive method of extracting federal revenues from the nation.

There is only one form of taxation, embodied in one bill, which
accomplishes this while satisfying the requirements set by the
President, Democratic leadership, Republican leadership and the Founding
Fathers: the FairTax Act of 2005. This bill, HR 25 in the House and S 25
in the Senate, has over \$20 million dollars of research supporting it
and an organization of more than 500,000 educated members across the
United States backing it up coordinated by
[fairtax.org](http://www.fairtax.org/). Recently, nearly 100 respected
economists also endorsed the FairTax legislation
(<http://www.fairtax.org/pdfs/Open_Letter_President.pdf>) stating, "The
FairTax Plan eliminates the tax bias against work, saving, and
investment, which would lead to higher rates of economic growth, faster
growth in productivity, more jobs, lower interest rates, and a higher
standard of living for the American people."

**I.** Description of Proposal

The FairTax is a single-rate, federal sales tax collected only once, at
the final point of purchase of new goods and services for personal
consumption. Used items are not taxed. Business-to-business purchases
for the production of goods and services are not taxed.

S 25 and HR 25 replace federal income taxes including, personal, estate,
gift, capital gains, alternative minimum, Social Security, Medicare,
self-employment, and corporate taxes.

The FairTax includes no exemptions because exempting items is neither
fair nor simple. Respected economists have shown that the wealthy spend
much more on unprepared food, clothing, housing, and medical care than
do the poor. Exempting these goods, as many state sales taxes do,
actually gives the wealthy a disproportionate benefit. Also, today these
purchases are *not* exempted from federal taxation. The purchase of
food, clothing, and medical services is made from *after* income tax and
*after* payroll tax dollars, while their purchase price hides the cost
of corporate taxes and private sector compliance costs.\
Further, exempting one product or service, but not another, opens the
door to the army of lobbyists and special interest groups that plague
and distort our taxation system today. Those who have the money will
send their lobbyists to Washington to obtain special tax breaks in their
own self-interest. This process causes unfair and inefficient
distortions in our economy and must be stopped.

Under the FairTax, All valid Social Security cardholders, regardless of
income level or job status, who are U.S. residents receive a monthly
rebate equivalent to the 23% inclusive FairTax rate paid on essential
goods and services, also known as poverty level expenditures. The rebate
is paid in advance, in equal installments each month. The size of the
rebate is determined by the Department of Health & Human Services'
poverty level multiplied by the FairTax rate. This is a well-accepted,
long-used poverty-level calculation that includes food, clothing,
shelter, transportation, medical care, etc.

+-----+------+-----------+-------+-------+-----------+------+------+
| **  |      |           |       |       |           |      |      |
| Fig |      |           |       |       |           |      |      |
| ure |      |           |       |       |           |      |      |
| 1:  |      |           |       |       |           |      |      |
| 2   |      |           |       |       |           |      |      |
| 004 |      |           |       |       |           |      |      |
| Reb |      |           |       |       |           |      |      |
| ate |      |           |       |       |           |      |      |
| c   |      |           |       |       |           |      |      |
| alc |      |           |       |       |           |      |      |
| ula |      |           |       |       |           |      |      |
| tio |      |           |       |       |           |      |      |
| n** |      |           |       |       |           |      |      |
+-----+------+-----------+-------+-------+-----------+------+------+
| F   | HHS  | FairTax   | A     | Mo    | FairTax   | An   | Mon  |
| ami | an   | annual\   | nnual | nthly | annual    | nual | thly |
| ly\ | nual | con       | r     | r     | co        | re   | re   |
| s   | pov  | sumption\ | ebate | ebate | nsumption | bate | bate |
| ize | erty | a         | (s    | (s    | a         | (mar | (mar |
|     | l    | llowance\ | ingle | ingle | llowance\ | ried | ried |
|     | evel | (single   | pe    | pe    | (married  | cou  | cou  |
|     |      | person)   | rson) | rson) | couple)   | ple) | ple) |
+-----+------+-----------+-------+-------+-----------+------+------+
| 1   | \$   | \$ 9,310  | \$    | \$178 | N/A       | N/A  | N/A  |
|     | 9    |           | 2,141 |       |           |      |      |
| 2   | ,310 | \$12,490  |       | \$239 | \$18,620  | \$4  | \    |
|     |      |           | \$    |       |           | ,283 | $357 |
| 3   | \$12 | \$15,670  | 2,873 | \$300 | \$21,800  |      |      |
|     | ,490 |           |       |       |           | \$5  | \    |
| 4   |      | \$18,850  | \$    | \$361 | \$24,980  | ,014 | $418 |
|     | \$15 |           | 3,604 |       |           |      |      |
| 5   | ,670 | \$22,030  |       | \$422 | \$28,160  | \$5  | \    |
|     |      |           | \$    |       |           | ,745 | $479 |
| 6   | \$18 | \$25,210  | 4,336 | \$483 | \$31,340  |      |      |
|     | ,850 |           |       |       |           | \$6  | \    |
| 7   |      | \$28,390  | \$    | \$544 | \$34,520  | ,477 | $540 |
|     | \$22 |           | 5,067 |       |           |      |      |
| 8   | ,030 | \$31,570  |       | \$605 | \$37,700  | \$7  | \    |
|     |      |           | \$    |       |           | ,208 | $601 |
|     | \$25 |           | 5,798 |       |           |      |      |
|     | ,210 |           |       |       |           | \$7  | \    |
|     |      |           | \$    |       |           | ,940 | $662 |
|     | \$28 |           | 6,530 |       |           |      |      |
|     | ,390 |           |       |       |           | \$8  | \    |
|     |      |           | \$    |       |           | ,671 | $723 |
|     | \$31 |           | 7,261 |       |           |      |      |
|     | ,570 |           |       |       |           |      |      |
+-----+------+-----------+-------+-------+-----------+------+------+

The rebate is administered by the Social Security Administration, giving
Americans a negative federal tax rate to begin each month. As they
choose to purchase new goods and services throughout the month, they
raise their tax rate closer to the 23% inclusive federal tax they pay at
the cash register.\
Because the 23-percent inclusive FairTax would not be imposed on
necessities because of the rebate, an individual spending \$28,808 would
pay an effective tax rate of *only* 15.6 percent, not 23 percent. That
same individual will pay 17.3 percent of his or her income to federal
taxes under current law.

A billionaire under the FairTax spending \$10,000,000 pays a tax of
\$2,300,000 and gets a rebate of \$4,283 (assuming he is married and has
no children). His effective tax rate is 22.96 percent.) A middle-income
married couple, under the FairTax, with no children *spending* \$40,000,
would pay \$4,917 net of their rebate for an effective tax rate of 12.3
percent. The effective tax rate increases as spending increases, but
*never* exceeds 23 percent.

Charitable contributions will increase under the FairTax because they
depend on one factor more than any other: The health of the economy
(*not* tax benefits). As a wide range of economists agree on the
economic expansion the FairTax delivers, charitable contributions
benefit also.\
For example, of all the money that pours into churches every Sunday and
into a broad range of charities every day, only the 30 percent who
itemize get any tax benefit. The other 70 percent have given and keep
giving with no *tax* benefit whatsoever.\
The FairTax allows people to make charitable contributions out of
*pre-tax dollars*. Thus those generally less affluent taxpayers who do
not itemize see their cost of charitable giving go down under the
FairTax.\
Finally, the wealthy make decisions on charitable giving based on the
cause. Once they have determined the cause is worthy, their contribution
is structured to maximize the gift and minimize the tax. But the
intention to give comes first; taxes simply determine the structure --
rarely the amount -- of the gift.

The FairTax has many positive effects as well on residential real
estate. Today's homeowners, if they itemize (and 70% do not), pay their
interest with post-Social Security/pre-income tax dollars. They then pay
their principal with post-SS/post-income tax dollars. Those who do not
itemize get no advantages at all. Under the FairTax, *all* homeowners
make their *entire house payment* with pre-tax dollars.

With the FairTax, mortgage interest rates fall by about 25 percent
(about 1.75 points) as bank overhead falls; this is a huge savings for
consumers. For example, on a \$150,000, thirty-year home mortgage at an
interest rate of 7.00 percent, the monthly mortgage payment would be
\$999.12. On that same mortgage at a 5.25 percent interest rate, the
monthly payment would be \$830.01. Over 30 years, the 1.75-percent
decrease in interest rates in this instance would result in a \$60,879
cost savings to the consumer.

Further, first-time buyers save for that down payment much faster, as
savings are not taxed.\
Under the FairTax, home ownership is a possibility for many who have
never had that option under the income tax system. Lower interest rates,
the repeal of the income tax, the repeal of *all* payroll taxes, and the
rebate mean that Americans have more money to spend, and have an
increased opportunity to become home owners.

Retail businesses collect the tax from the consumer, just as state sales
tax systems already do in 45 states; the FairTax will just be an
additional line on the current sales tax reporting form. Retailers
simply collect the tax and send it to the state taxing authority. All
businesses serving as collection agents as well as the states will
receive a ¼ of one percent fee. The tax revenues from the states will
then be sent to the U.S. Treasury.

Under the FairTax, businesses would benefit as they enjoy a zero tax
rate. Corporations, subchapter S Corporations, partnerships, limited
liability companies, and sole proprietorships would pay no tax on their
income. Both the employee and employer share of payroll taxes, the
self-employment tax rate and the estate and gift tax would be abolished.

Additionally, compliance costs are a much more substantial economic drag
on small business than they are for larger businesses. According to the
Tax Foundation, small businesses spend \$724 to comply with the income
tax for every \$100 they pay in tax. More than 90 percent of all U.S.
corporations have assets of \$1 million or less and, therefore, bear
tremendous relative compliance burdens. In fact, small corporations bear
a compliance cost burden about 27 times greater than the largest U.S.
corporations, those with \$10 billion or more in assets.

Perhaps as important as these factors, is the impact that the FairTax
would have on economic growth. Businesses thrive in a healthy, growing
economy. The FairTax would cause the economy to grow and become much
more dynamic. In a recent paper, Dale Jorgenson of Harvard University
states that, "the revenue neutral substitution of the FairTax for
existing taxes would have an immediate and powerful impact on the level
of economic activity. GDP would increase by almost 10.5 percent in the
first year." Laurence Kotlikoff of Boston University found that
implementation of the proposed tax reform plan "raises the economy's
capital stock by 42 percent, its labor supply by 4 percent, its output
by 12 percent, and its real wage rate by 8 percent. It also lowers real
interest rates by more than one quarter."

**II.** Impact of Proposal Relative to Current System

A consumption tax is a more stable source of revenue than income. A
recent study by American Farm Bureau economist Ross Korves shows the
FairTax base was less variable than the income tax base. During
difficult times due to loss of a job or an inability to work, people may
not have as much income, or may have no income at all. They borrow funds
or use savings. They may not have earnings, but they still continue to
consume.

A fundamental notion of fairness is that citizens should be able to
comprehend the tax laws that affect them. However, current tax law is
beyond the comprehension of most taxpayers, including many of those who
devote their entire professional lives to it. The current tax code fills
more than 2,000 pages of documents; the regulations covering
implementation of the tax code more than 12,000 pages; and, court
rulings on IRS regulations occupy another 200,000 pages. So complicated
is the current tax system that the IRS estimated that in 1985 taxpayers
spent an estimated 5.43 billion hours yearly to comply with it. The
number was estimated to be 10.2 billion in 1995. The FairTax is fair and
simple: one single rate, with no exceptions and no exclusions, collected
at the point of purchase. The simplicity of the FairTax means that tax
planning is now within the reach of the ordinary taxpayer, who can
choose when and whether to pay federal taxes by deciding when to make
purchases and whether to buy new or used products. Further, the FairTax
is the most transparent tax devised, being administered under the bright
lights of the retail counter.

The FairTax is fair, and in fact, much fairer than the income tax.
Wealthy people spend more money than other individuals. They buy
expensive cars, big houses, and yachts. They buy filet mignon instead of
hamburger, fine wine instead of beer, designer dresses and expensive
jewelry. The FairTax taxes them on these purchases. If, however, they
use their money to build job-creating factories, finance research and
development to create new products, or fund charitable activities (all
of which help improve the standard of living of others), then those
activities are not taxed.

With the penalty for working harder and producing more removed,
Americans are free to keep every dollar they earn, and a new era of
economic growth and job creation is unleashed. Hidden taxes are history,
Americans are able to save more, and businesses invest more. Capital
formation, the real source of job creation and innovation, is
facilitated. Gross domestic product (GDP) increases by an estimated 10.5
percent in the first year alone. The FairTax as proposed raises the
economy's capital stock by 42 percent, its labor supply by four percent,
its output by 12 percent, and its real wage rate by eight percent.

Since all U.S. exporters immediately see an average 20-percent reduction
in their production costs, they experience an immediate boost in their
competitiveness overseas. American companies doing business
internationally are able to sell their goods at lower prices but similar
margins, and this brings jobs to America. In addition, U.S. companies
with investments or plants abroad will bring home overseas profits
without the penalty of paying income taxes, thus resulting in more U.S.
capital investment.\
And at last, imports and domestic production are on a level playing
field. Exported goods *are not* subject to the FairTax, since they are
not consumed in the America; but imported goods sold in the U.S. *are*
subject to the FairTax because these products are consumed domestically.
Congressman John Linder of Georgia is quoted as saying, \"If we were to
get rid of \... the income tax and the payroll tax and all compliance
costs, we would be so ferociously competitive in a world economy that
corporate America would not be competed with unless foreign corporations
started building their plants in America.\"\
As U.S. companies and individuals repatriate, on a tax-free basis income
generated overseas, huge amounts of new capital flood into the United
States. With such a huge capital supply, real interest rates remain low.
Additionally, other international investors will seek to invest here to
avoid taxes on income in their own countries, thereby further spurring
the growth of our own economy.

It is estimated that Americans spend at least \$250 billion a year to
comply with the tax code -- that's \$850 for every man, woman, and child
in America. Billions of dollars in compliance costs are wasted each
year, and we have nothing of value to show for this expenditure -- not
one single productive service or product is added to our nation's
wealth. It is estimated that the FairTax dramatically cuts such
compliance costs, perhaps as much as 95 percent.

**III.** Transition, Tradeoffs and Special Issues

Everyone will have to think about taxes in a different way under the
FairTax. Income -- what we earn -- will no longer have to be documented,
measured and kept-track-of for tax purposes. The only relevant measure
of our tax liability will be the amount we choose to spend on final,

discretionary consumption. Tax-related issues will suddenly be a lot
simpler and more straightforward than they used to be. The aggravation
and anxiety associated with "April 15th " will disappear forever after
passage of the FairTax. The FairTax is not new; most Americans come into
contact with such taxes daily, since 45 states currently use them to
collect state revenues. Of course, those who depend on the structure and
complexity of our current system (e.g., tax lobbyists, tax preparers,
and tax shelter promoters) will have to find more productive economic
pursuits. However, everyone will have enough advance notice to adjust to
the new system.\
Job creation will boom. Residential real estate will boom. Financial
services will boom. Exports will boom. Retail will prosper. Farming and
ranching will prosper. Churches and charities will prosper. Civil
liberties will be enhanced. In short, it is difficult to imagine the
far-reaching, positive effects of this change. Though this tax policy is
exactly what our Founding Fathers counseled us to do with the
*Federalist Papers* and the Constitution.

The proper tax rate has been carefully worked out to be revenue neutral;
23 percent does the job of: (1) raising the same amount of federal funds
as are raised by the current system, (2) paying the universal rebate,
and (3) paying the collection fees to retailers and state governments.
Unlike some other proposals, this rate has been independently confirmed
by several different, non-partisan institutions across the country.
Detailed calculations are available from
[FairTax.org](http://www.fairtax.org/).

The last time America rose up to discard an oppressive tax code, great
things were set in motion for this nation. We have the opportunity to do
so once again. I implore you to recommend the Fair Tax Act of 2005 to
the President.