RESPONSE TO REQUEST FOR COMMENTS

By the Federal Tax Reform Panel on April 5, 2005

Peter J. Hartz

Self-Employed Small Business Owner

1881 Kendall Court

Yuba City, CA 95993

Tel. (530) 790-7413

Submitted Tuesday, April 26, 2005

Individual Submission to Federal Tax Reform Panel

This is in response to the panel's request for ideas to reform the tax
code. Before discussing a specific proposal, I'll review what I believe
to be the necessary requirements for any new tax scheme.

First and foremost, the taxing system should be simple. This eliminates
systems such as our present income tax which is a hodgepodge of
regulations even the IRS doesn't fully understand. If one has their
taxes prepared by three different tax services, the likelihood is that
one will get three different results. Even if one solicits assistance
from the IRS, the IRS will not guarantee the return is correct. The
requirement of simplicity also eliminates various "hybrid" proposals
such as a combination of income and consumption taxes. These proposals
make taxation more complex, not more simple!

Second, the new proposal should eliminate the huge amounts of wasted
effort required by the current tax code to keep detailed records. Each
year businesses devote millions of man-hours of work and tons of paper
to the non-productive activities related to documenting, compiling, and
maintaining business records that are needed for no purpose other than
supporting one's income tax return. This huge drain on resources is
unnecessary and reduces America's productivity and global
competitiveness. Fulfilling this requirement eliminates not only income
based taxation, but also other paper-intensive proposals such as a VAT
tax.

Thirdly, a new tax system should reduce tax cheating. Any system based
on income is easy to cheat by not reporting or under-reporting income.
Despite devoting tremendous manpower and resources to enforcement, t is
simply impossible for the IRS to keep track of miscellaneous income from
odd jobs, internet auctions, garage sales, under-the-counter payrolls,
and unregistered sole proprietorships. In my experience with
contractors, landscapers, yard maintenance companies, housecleaning
people, and other businesses, such unreported income is rampant. So long
as transactions are done in cash, there simply is no audit trail for the
IRS.

Fourthly, the new tax system should be fair. Those who are the largest
consumers of resources should pay the most taxes. There should be no
corporate or individual tax shelters, no havens for special interests,
and no advantage for the rich. The new system should eliminate loopholes
and credits that only those who can afford lawyers and CPA's can find
and exploit.

I think that a good approach, that accomplishes these objectives, is the
FairTax proposal, S-25 and HR-25. This proposal is simple, revenue
neutral, and fair to lower income individuals. It eliminates the burdens
of paperwork and accounting the current system places on individuals and
small businesses. Because it is consumption based, it eliminates cheats
who fail to report income. Finally, it places the greatest tax burden on
those who consume the most. In view of the importance of home ownership
and support for charities in our society, one might consider adding
consideration for these two issues to the prebate formula used by
FairTax. Beyond that, I think very little "tinkering" is necessary or
warranted.

So far, I've heard few informed criticisms of the FairTax approach. One
criticism is that sales taxes are "regressive." The politicians who have
labeled it regressive have never explained what that means. To me, it is
progressive. A regressive system is one that is burdensome, unfair, and
unenforceable -- in other words, what we now have.

A second criticism I've heard is that placing a 23-25% sales tax on
purchases could hurt the economy. These critics conveniently forget that
everyone will automatically get an enormous pay increase when Social
Security, Federal Income Tax, and Payroll Taxes are no longer deducted
from their pay. What really happens with the FairTax approach is that
the insidious drain of payroll deductions is made visible when you
collect the tax money at the spending end, rather than the earning end.
Other countries have VAT's (the equivalent of a sales tax with a lot of
paperwork) and that doesn't harm their economies or stop people from
spending.

A final criticism I've heard of a consumption based tax is that it is
unfair to lower income individuals. So far as I can see, the people
making this claim have simply failed to look at the FairTax proposal and
are speaking from ignorance. Because the proposal incorporates a rebate
system to offset taxes on essentials, it is eminently fair.

Chairman Greenspan has said that a consumption tax approach is good, but
hedged on the issue stating it would be unpopular. Yes, it will be
unpopular because it makes visible just how much of our earnings go to
taxes. Yes, it will be unpopular because those who cheat on taxes will
now have to pay their fair share. It will be unpopular to those who work
the loopholes and take advantage of tax shelters. Finally, it will be
unpopular with those who earn and spend huge amounts of money, because
they will now have to pay their fair share of taxes, rather than passing
the burden off to middle income Americans. Hopefully, our leaders will
have the courage to look beyond what is popular, and implement a
taxation system that is simple, fair, and will make America stronger.

**Thank you for this opportunity to comment.**

Peter J. Hartz