A Proposal for Comprehensive Tax Reform

Submitted by:

Elizabeth A. Male, an Individual

On

April 25, 2005

**I. DESCRIPTION OF THE PROPOSAL:** H.R. 25, The Fair Tax Act

**Tax Base:** Consumption

**Exemptions, Deductions, Credits:** None

**Exclusions:** Poverty Level Expenditures

**Tax Rate:** 23% Inclusive, 30% Exclusive

**Distribution of the Tax Burden:**

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height="4.103472222222222in"}

**Treatment of Charitable Giving: Tax Free, Free of Tax**

Many assume that the level of charitable giving in America is driven by
the tax code and tax deductions, concluding that if charitable donations
were not deductible, then charitable organizations could not exist.
Nothing could be further from the truth.

**After the 1986 Tax Reform Act, charitable giving increased rather than
decreased, despite the lowering of marginal income and transfer tax
rates.** Charitable giving rose by \$6.4 billion, or 7.6 percent, in
1987 after the top tax rate fell from 50 to 28 percent (more than
doubling the tax price of giving). Likewise, the growth of charitable
bequests was most rapid from 1980 to 1987 when estate taxes were coming
down. **Simply stated, when we have more money in our pockets, we give
more. Americans are the most genuinely generous people on the earth and
the current tax code impedes rather than encourages charitable giving.**

**The majority of charitable contributions today come from
*non-itemizers*.**

Under current income tax law, most taxpayers *cannot* deduct charitable
contributions and as a result, their contributions are made with after
tax dollars. Only the one-out-of-three taxpayers who itemize may deduct
their contributions. Under the FairTax, **ALL contributions would be
made with *pre-tax dollars****.* This should cause a significant
INCREASE in charitable giving once the Fair Tax is enacted. It should be
noted that under our current system, percentage ceilings limit
individual contributions -- even if a taxpayer itemizes. For example,
all contributions are limited to fifty percent or less of adjusted gross
income. This percentage is ten percent for corporations. These ceilings
provide a disincentive to the charitably inclined and they all disappear
under the FairTax.

**In summary: The Second Golden Age of Charitable Giving starts with the
FairTax.**

The first golden age of charitable giving paced the Industrial
Revolution boom in the American economy in the early part of the last
century. This age was ended by the passage of the income tax. Ending
that income tax initiates the Second Golden Age. When this happens,
charities\' ability to meet their clients\' needs increases
dramatically, reducing demand for government to fill the gap. This in
turn means that tax dollars can be spent more beneficially elsewhere, or
taxes may be reduced.

**Treatment of Home Ownership:**

The FairTax plan is an integrated proposal with many positive features,
not the least of which are the advantages that will accrue to
residential real estate ownership.

-   Pay your entire house payment, both principal and interest, with
    "pre-tax" dollars.

-   Get this benefit without itemizing deductions, which only a small
    percentage of

homeowners do today.

-   Save for down payments much faster, without the penalty of taxation.

-   Reduce interest rates even lower than they are today.

-   IN SUM, The FairTax would be a boom for homeownership, and allow
    most to achieve the American Dream.

**Collection Method:**

The Fair Tax is collected ONCE and only once from the end user. It will
be collected primarily by retailers, but service providers will also be
responsible for collecting and remitting 23%, tax inclusive rate of all
sales. This equates to roughly 30% of the price of the good or service.
Those who are responsible for collecting and remitting this tax are
compensated the greater of \$200 or .25% of the tax collected for each
month that the tax return and remittance are timely.

**Treatment of Business:**

**Simply stated: Businesses are not taxed under the FairTax plan.**
Whereas some might be inclined to see this as a significant shift in the
tax burden, in fact it will not represent a shift in the incidence of
taxation because **"Corporations don't pay taxes, people do!"**
Corporations simply pass the cost of the tax and compliance on to any
one or combination of three groups of people: Investors in the form of
reduced return on investment, employees in the form of reduced wages and
benefits, or finally to consumers in the form of higher prices. Entity
level taxation is an invisible and insidious tax which is hidden from
consumers, investors and employees. **It is THE most destructive tax we
impose on ourselves.**

The Fair Tax is imposed on the final purchaser of goods or services and
to the extent that businesses consume goods or services to produce a
good or service for resale, they will not be taxed. This will be a boon
for business and job creation, but most importantly, **it will improve
our position in the world marketplace**.

The WTO has repeatedly authorized retaliatory tariff's on U.S. goods in
response to our clumsy attempts to unburden US goods or border adjust
the cost of taxation from the export price. The Domestic International
Sales Corporation, The Foreign Sales Corporation, and the
Extra-Territorial Income Exclusion were all found to be unlawful export
subsidies in the eyes of the Dispute Settlement Body of the WTO. The
Byrd Amendment is likewise disfavored.

Because FSC/ETI was found to be unlawful, until Congress acted to repeal
the subsidy, our businesses were subjected to up to \$4 BILLION in
punitive, retaliatory tariffs. What is worse, perhaps, is the
legislation spawned in response. **HR 4250, The American Jobs Creation
Act, a bill spanning more than 500 pages, full of narrow interest
provisions, was the most egregious example of larceny by lobbyist that
I've ever seen.** We must defang the WTO and put an end to the
Congressional contortions.

The FairTax is open, transparent and easily border adjusted, much like
the VAT of Europe. The repeal of subchapter C and the imposition of an
easily border adjusted retail sales tax should satisfy the requirements
of the WTO and allow our goods to compete on an equal footing in the
world market, WITHOUT Congressional Contortions, or the grant of narrow
interest favors to campaign contributors. This is essential if we are to
maintain our status, economic prosperity and standard of living.

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

> **Compliance and Administration Costs:** The complexity borne of over
> 60,000 pages of code, regulations, etc. is extreme. Compliance costs
> are conservatively estimated at over \$250 BILLION per year and the
> IRS estimates that Americans spend 6.6 BILLION hours complying with
> the current code. This is time and money that could be spent in
> activities which contribute something real to our GDP. This nonsense
> must cease.
>
> While actual estimates of cost and time are not available for the
> FairTax, a system borne of 140 page bill, which is pay-as-you-go for
> virtually all, certainly could not cost one-tenth of the money or time
> that our current system demands. We must abolish this code in favor of
> a simple, visible, easily administered system such as the Fair Tax.
>
> **Economic Growth and Competitiveness:** I addressed international
> competitiveness under the heading "Taxation of Business," but I would
> like to add some additional commentary with respect to individual
> growth and productivity.
>
> Under our current system, for those who are truly productive and
> contributing to our society, we penalize each productive hour spent
> with a tax bill. This tax bill comes in the form of a bill for FICA,
> Medicare and Income Tax. Because of the progressivity of our current
> system, we penalize additional productive hours more heavily than the
> first productive hours. For those earning less than the social
> security cap, this creates a work disincentive that is pernicious.
> Moreover, the EITC creates a work disincentive for those at the lower
> end of the earning spectrum. The "Collectors" of the EITC quickly
> learn that the payout follows a bell-shaped curve and they adapt their
> work habits accordingly. This insanity must cease. We must stop
> penalizing work and productive behavior and we must stop paying people
> to do poorly.
>
>  **A system of taxation based on consumption will tax that which
> individuals take from society instead of that which they contribute to
> it. Surely that is a more sane, rational and moral basis for taxation
> than our current system which taxes productivity and impedes personal
> and economic growth. **
>
> **Fairness and Simplicity:**
>
> Our current system is anything but fair or simple. The truly wealthy
> employ tax advisors and financial planners to avoid the Income, FICA
> and Medicare taxes. The use of tax shelters, tax-free municipal bonds
> and certain organizational structures allow those who can afford tax
> counsel to avoid much of the tax burden. In fact, in 2003, John Kerry
> and Teresa Heinz-Kerry paid less as a percentage of their total income
> than my husband and I did. My understanding is that they were able to
> accomplish this feat by relying on tax-free municipal bonds for most
> of their income. We must stop taxing income and capital. We must
> return to the vision of the prudent and prescient Founders. They spoke
> of tax matters directly in The Federalist Papers. In Federalist No.
> 21, Hamilton said:
>
> "**It is a signal advantage of taxes on articles of consumption, that
> they contain in their own nature a security against excess.** They
> prescribe their own limit; which cannot be exceeded without defeating
> the end proposed, that is, an extension of the revenue. When applied
> to this object, the saying is as just as it is witty, that, \`\`in
> political arithmetic, two and two do not always make four.\'\' If
> duties are too high, they lessen the consumption; the collection is
> eluded; and the product to the treasury is not so great as when they
> are confined within proper and moderate bounds. This forms a complete
> barrier against any material oppression of the citizens by taxes of
> this class, and is itself a natural limitation of the power of
> imposing them. Impositions of this kind usually fall under the
> denomination of indirect taxes, and **must for a long time constitute
> the chief part of the revenue raised in this country**."

Moreover, in Federalist No. 62, Madison said:

> "The internal effects of a mutable policy are still more calamitous.
> It poisons the blessing of liberty itself. **It will be of little
> avail to the people, that the laws are made by men of their own
> choice, if the laws be so voluminous that they cannot be read, or so
> incoherent that they cannot be understood; if they be repealed or
> revised before they are promulgated, or undergo such incessant changes
> that no man, who knows what the law is to-day, can guess what it will
> be to-morrow. Law is defined to be a rule of action; but how can that
> be a rule, which is little known, and less fixed?**
>
> Another effect of public instability is the unreasonable advantage it
> gives to the sagacious, the enterprising, and the moneyed few over the
> industrious and uniformed mass of the people. **Every new regulation
> concerning commerce or revenue, or in any way affecting the value of
> the different species of property, presents a new harvest to those who
> watch the change, and can trace its consequences; a harvest, reared
> not by themselves, but by the toils and cares of the great body of
> their fellow-citizens. This is a state of things in which it may be
> said with some truth that laws are made for the FEW, not for the
> MANY.**
>
> In another point of view, great injury results from an unstable
> government. The want of confidence in the public councils damps every
> useful undertaking, the success and profit of which may depend on a
> continuance of existing arrangements. **What prudent merchant will
> hazard his fortunes in any new branch of commerce when he knows not
> but that his plans may be rendered unlawful before they can be
> executed? What farmer or manufacturer will lay himself out for the
> encouragement given to any particular cultivation or establishment,
> when he can have no assurance that his preparatory labors and advances
> will not render him a victim to an inconstant government? In a word,
> no great improvement or laudable enterprise can go forward which
> requires the auspices of a steady system of national policy.**
>
> **[But the most deplorable effect of all is that diminution of
> attachment and reverence which steals into the hearts of the people,
> towards a political system which betrays so many marks of infirmity,
> and disappoints so many of their flattering hopes. No government, any
> more than an individual, will long be respected without being truly
> respectable; nor be truly respectable, without possessing a certain
> portion of order and stability]{.underline}."**

The tax code has been changed no fewer than 14,000 times since 1986. It
is a voluminous monument to/of deficient wisdom, bought and paid for by
special interests that give an unfair advantage to the sagacious,
moneyed few. The American people have developed such contempt for the
IRS and irreverence for the government in general that the 'tax gap' for
2001 is estimated to be between \$312 and \$353 BILLIION. We must
relegate this monstrosity to the dustbin of history.

The Fair Tax is elegant in its simplicity, fully transparent, easily
administered, fair to all, and protects the poor, will encourage
homeownership and charitable giving, and improve our competitiveness in
the world market.

**III. Transition Issues**

**Transition:**

The transition to FairTax will be greatly simplified by systems already
in place that collect state and local sales taxes. Those systems can be
easily modified to include a national sales tax.

**Tradeoffs:**

The FairTax would require no \"tradeoffs\". The FairTax is very specific
in that no special consideration would be given to any people, any
industry or any business. In tax parlance, it is neutral with respect to
saving and investment and will induce the minimum possible distortion
into economic decisions. The Current tax code picks and chooses winners
and losers. We must stop this nonsense.

**Special Issues:**

The FairTax will require that checks be sent to qualified households on
a monthly basis. The check would represent the tax \"pre-bate\" to cover
tax on purchases up to the poverty level. This would be done by the
Social Security Administration which has an excellent track record of
accuracy in benefit payments.

Businesses that have inventory in stock on the close of business the day
before the FairTax goes into effect, will qualify for a transitional
FairTax credit if the sale of the inventory is taxed under the FairTax
and is sold within two years.

The transitional inventory credit is equal to the cost of the qualified
inventory times the FairTax rate. The credit may be claimed on the
monthly sales tax report when the inventory is sold subject to the
FairTax.

Businesses may sell the right to receive the credit, so the credit can
follow the qualified inventory through the production process. Qualified
inventory includes work-in-process.

**I implore you to scrap the monument of deficient wisdom known as Title
26.**

**Please recommend HR 25, The Fair Tax Act as THE replacement for the
current code.**