**[President's Advisory Panel On]{.underline}**

**[Federal Tax Reform]{.underline}**

**April 29, 2005**

**Response to Request For Comments II**

**In support of HR 25/S 25**

**The FairTax Act of 2005**

**Individual Submission by Philip L. Hinson, CPA**

**Atlanta, GA**

[**PLH001@comcast.net**](mailto:PLH001@comcast.net)

**Part I Description of Proposal**

**I.1 the tax base (income, consumption, hybrid)**

Consumption -- All new goods and services purchased for personal
consumption within the USA will be subject.

**I.2 exemptions, deductions, credits and exclusions**

The FairTax proposal includes a provision for a monthly rebate or
Personal Consumption Allowance (PCA). This mechanism is the simplest,
fairest way to ensure that lower income Americans are protected. It
makes the FairTax a progressive tax when measured by consumption level.
Unlike state sales taxes which exempt specific consumption items and
categories, it recognizes that that mechanism is inherently subjective
and prone to political manipulation. In addition, it is virtually
impossible to define specific "necessities" in a uniform and consistent
manner.

**I.3 tax rate(s)**

The revenue-neutral rate is currently 23% (tax inclusive) or 29.9% (tax
exclusive). The rate calculation was done prior to the tax cuts of the
last four years and can reasonably be expected to be somewhat less than
that when recalculated.

**I.4 distribution of the tax burden (including provisions for relief
for low-income individuals)**

The rebate or PCA provides an extremely effective way of ensuring that
the burden is distributed in an appropriate manner. In fact, those
living at or below the poverty level will see a real increase in
purchasing power due to the dual effects of (i) the rebate offsetting
the taxes paid at checkout up to the poverty level, and (ii) the
reduction in pre-tax prices of U.S.-produced goods. Those choosing to
consume above the poverty level will contribute to federal revenues at
rates which increase as consumption increases, but which approach but
never reach the stated rate (currently 23%) of the sales tax. Unlike the
current system, which enables many extremely affluent taxpayers to
escape their theoretical corresponding stated tax rates, the actual
rates will much more closely approach the stated tax rates.

For the first time, illegal immigrants and foreign visitors will be
included on our tax rolls. A recent study by Bear Stearns suggests that
the illegal immigrant population may be double previous estimates of 10
million.

**I.5 treatment of charitable giving**

All charitable contributions will be made with pre-tax dollars, which is
the effect of the current Schedule A deduction. However, unlike the
current system, that benefit will not be limited to taxpayers who
itemize, nor will it be subject to limitations and exclusions contained
in the Internal Revenue Code. Additionally, the rate of economic growth
and the creation of many good paying jobs should not be overlooked as a
significant factor in this area. The FairTax environment will be one
which will be more gift friendly than the current one.

**I.6 treatment of home ownership**

New homes sold after enactment will be subject to the sales tax.
However, as with other U.S.-produced goods, pre-tax prices will decline
substantially, largely offsetting the imposition of the sales tax. In
addition, workers will be able to save for a new home much more quickly
with no deductions from their paychecks. The combination of removing the
tax expense on interest income, as well as the influx of a substantial
portion of the \$5 -- 6 trillion in capital currently stranded by our
current tax system will also create a favorable interest rate
environment relative to the current one. In addition, the economy will
be expanding significantly, creating many new jobs which would not
otherwise be present. The FairTax environment will be one which is
extremely conducive to home ownership.

**I.7 collection method(s)**

The NRST (National Retail Sales Tax) will be largely collected by the
states, for which they will be compensated ¼%. Most states already have
sales taxes and this will prove to be a very efficient and cost
effective mechanism.

**I.8 treatment of businesses**

Businesses will no longer have the expense of corporate income and
payroll taxes, nor the enormous compliance costs associated with each.
The FairTax is industry neutral and because it removes the burden of
imbedded taxes on U.S. producers, it makes U.S.-produced goods more
price competitive, both in foreign markets and here in our own market as
well. It will dramatically increase the demand for U.S.-produced goods
at a time when trillions of dollars in stranded capital will be freed to
return to this country. It is the most significant jobs creation bill on
the horizon.

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

**II.1 simplicity (including transparency and stability)**

The current system, according to Commerce Clearing House, is now in
excess of 60,000 pages. The FairTax bill is slightly over 100 pages.
Even allowing for a significant increase in that number before it is
passed into law by Congress, it still represents the most enormous
simplification imaginable. Because of the removal of all imbedded taxes,
its transparency will greatly exceed the current system or any other
proposal that I am aware of. FairTax supporters will fiercely oppose any
attempts to insert special interest provisions into the proposal or to
depart from the goal of being industry neutral. Once the system has been
implemented and Americans learn to appreciate the simplicity and
efficient design of the new system, they will join FairTax supporters in
opposing efforts by Congress to return to business as usual.

**II.2 fairness**

The FairTax excels in this area, also. By eliminating the myriad of
special interest provisions which have compromised the efficiency and
fairness of the current system and replacing them with a single rate,
highly visible consumption tax, the fairness of the system will be
greatly improved. While there will be some period of psychological
adjustment, Americans will soon understand just how perverse the old
system was. For example, most Americans do not know that our current
system is biased in favor of foreign producers, but they will come to
grasp that soon after the FairTax is implemented. In addition, they will
realize just how much of the current tax burden is hidden in the prices
of their consumption purchases.

One other aspect of the FairTax deserves mention in this regard. Under
the current tax system, illegal immigrants often labor in jobs which do
not withhold payroll taxes and they do not file income tax returns.
Although they pay imbedded taxes with their consumption, few Americans
are aware of that and those who are also understand that illegal
immigrants pay disproportionately less than legal citizens under the
current system. Under the FairTax, illegals would not be eligible for
the rebate/PCA. For that reason, they would be paying taxes that are
disproportionately higher than legal U.S. citizens. That would be widely
perceived as fairer than the current system.

**II.3 economic growth and competitiveness**

The economic study which was done on the FairTax by Dr. Dale Jorgenson,
then Chairman of Harvard University's economics department, forecast GDP
growth of 10.5% in the first year after implementation. Other
economists, such as Dr. Lawrence Kotlikoff of Boston University, have
indicated that it might be even higher. GDP growth would decline
slightly in subsequent years before leveling off at a rate that is a
fraction of a percent higher than under a continuation of the current
system many years later. By that time, the economy would be ¼ to 1/3
larger than it otherwise would have been.

Consumption would decline by about 8% in year one, due to the impact of
higher after-tax prices on imported goods, as the preference in our tax
system for foreign producers is eliminated. That decline would be a
combination of a significant drop in consumption of imports, partially
offset by a lower magnitude increase in the consumption of U.S.-produced
goods. After year one, consumption growth would be faster, catching up
to where it would have been under a continuation of the current system
by about the 4^th^ or 5^th^ year. From that point forward, consumption
would be greater than it would have been under a continuation of the
current system, owing to a much more robust, faster growing economy. It
would, of course, be much more heavily skewed toward consumption of
U.S.-produced goods than would have been the case under a continuation
of the current system.

Virtually every economist that I have heard comment on our economy
recently has said that our historically low national savings rate is a
structural problem in our current economy and creates other economic
problems. It is basic that we have to decrease our consumption rate in
order to increase our savings rate. This drop, as I have stated above,
will be temporary and a very reasonable sacrifice in exchange for
significantly improving the competitive position of U.S. producers and
the savings and investment rates.

**II.4 compliance and administration costs**

The FairTax is the most simple and efficient tax reform proposal in
existence. Accordingly, it would save hundreds of billions of dollars in
compliance costs for business and individuals. Even retailers, the only
group which would be responsible for collecting and remitting the tax
and filing returns, would see a substantial net reduction in
administrative burden and compliance costs. That is because the
administrative burden associated with collecting and processing the NRST
would be substantially less than with the current combination of
corporate income taxes and payroll taxes.

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

**III.1 Transition**

The FairTax has a transition rule which will allow businesses to take a
credit which will approximate the amount of taxes imbedded in inventory
on hand on the date of implementation. This will enable merchants to
reduce prices on day one of the FairTax regime.

**III.2 "Hybrid" Approach**

The FairTax is intended as a replacement of, rather than an augmentation
to, the current tax system. It replaces all federal income taxes,
including personal, gift, estate, capital gains, alternative minimum,
Social Security/Medicare, self-employment, and corporate taxes. These
taxes comprise approximately 95% of all federal revenues and only excise
taxes are left intact. A sales tax will not work as an additional tax.
The many supporters who have labored long and hard to bring this matter
to the forefront understand all too well the tendency for rates to rise
and are deeply suspicious of attempts to add a sales tax onto the
existing array of taxes. In addition, many of the economic benefits
would be lost. While it may be tempting politically to follow Chairman
Greenspan's admonition not to insist on "purity", the reality is that
thousands of volunteers and millions of dollars in potential donations
would be lost to any attempt to compromise the simplicity and elegance
of the design. Americans For Fair Taxation and its grassroots of
thousands of patriotic, intelligent and committed volunteers stand by to
work even harder to complete their mission. That factor must be taken
into consideration when evaluating any "hybrid" option.

**III.3 The Opportunity**

When Mr. Jimmy Carter ran for President in 1976, he referred to the
Internal Revenue Code as a "disgrace". Since then it has gotten much,
much worse. For example, according to Commerce Clearing House (CCH), the
total pages of the system numbered somewhere between 20,000 and 25,000
pages at that time. It is now in excess of 60,000 pages according to
CCH. The American people are becoming more and more aware of how
inefficient and counter to our national values our tax system is.
However, the average American has neither the time nor the resources to
study the issue and understand the alternatives and the trade-offs which
they entail. They just know that something needs to be done. President
Bush has made an astute decision in appointing this distinguished
commission.

As we enter the 21^st^ century, our country faces a whole host of
economic challenges which are contributed to in varying degrees by our
antiquated and inefficient tax system. Included in that list should be:

1.  Our rapidly expanding trade deficit,

2.  the looming insolvency of Social Security and Medicare,

3.  the continuous spiral of complexity and compliance costs,

4.  our extremely low savings and investment rate,

5.  our federal budget deficit,

6.  the ongoing inability of our expanding economy to produce enough
    good paying jobs,

7.  the AMT (Alternative Minimum Tax).

Collectively, these challenges are enormous. It seems improbable that
any single policy decision could be effective in significantly improving
our country in each and every one of these areas. However, that is
exactly what the FairTax does. There is no other alternative which does
that to the degree that it does, or even comes close. The FairTax is
clearly the preferred alternative based on its economic merits relative
to other options.

The 21^st^ century will be unlike any that we have seen before. As
former Speaker of the House Newt Gingrich recently observed, we will be
faced for the first time with economies which have the potential to
operate on our scale. He was speaking, of course, of China and India. I
am of the opinion that this situation and the war on terrorism are the
two big challenges that this generation will have to face. It would be
unconscionable for our government to hold on to a tax system which it
knows puts our own producers at a disadvantage as we enter into this
environment.

Even if one believes that the myriad of incentives that our tax code
provides are, on balance, a positive factor in our economy and our
society, are they really worth the hundreds of billions of dollars that
we pay for that benefit in compliance costs? As economist Dr. Donald
Ratajczak has written, studies have shown that direct subsidies are a
much more cost-effective and efficient way to incentivize citizens and
businesses than tax code manipulations.

FairTax supporters fully understand how much work remains in educating
the American public. However, we also understand how much is at stake if
we can "get it right". I am convinced that once the case has been made
with a strong and effective national media campaign, the American people
will respond in a positive and vigorous manner. This committee can make
an immeasurable contribution toward that end by making a strong and
unequivocal endorsement of the FairTax in its report to the President.
If this panel will recommend the FairTax, the conditions are set up to
finally do something about our out-of-control tax system which seems to
have a will of its own.

I appreciate the contributions this panel is making to our country and I
appreciate the opportunity to make this statement to The President's
Advisory Panel on Federal Tax Reform.