# Specific Proposals for Reform of the Federal Tax Code

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

**On behalf of the**

**National Small Business Association**

**April 27, 2005**

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**1156 15^th^ Street, N.W., Suite 1100**

**Washington, DC 20005**

**202.293.8830**

The National Small Business Association (NSBA) is pleased to have the
opportunity to offer a specific proposal to reform the existing tax
system. Our organization strongly supports the President's Advisory
Panel on Federal Tax Reform and its efforts to identify the best
replacement to our current tax code.

NSBA is the nation's oldest small business advocacy organization
representing 150,000 small business owners at the federal level. Our
members gather at the beginning of every new Congress to choose the
organization's top 10 priorities. For the 109^th^ Congress, NSBA members
choose fundamental tax reform as their number one priority. In
particular, NSBA members choose to support the Fair Tax, as proposed in
the House of Representatives by Representative John Linder (H.R. 25) and
in the Senate by Senator Saxby Chambliss (S. 25).

**I. Description of Proposal**

The Fair Tax replaces the individual income tax, corporate income tax,
capital gains tax, payroll tax, estate and gift taxes with a 23 percent,
single rate, national retail sales tax applied to the sale of all new
consumer goods and services at the final point of consumption.

The tax will be collected by businesses at the point of final
consumption in a similar manner to the way state sales taxes are
currently collected. Businesses would receive an administrative credit
equal to one quarter of one percent of taxes collected. Used items will
not be taxed. Because tax is only applied to final consumption, most
business-to-business transactions would be untaxed.

President Bush's request that replacement tax systems continue to
encourage home ownership and charitable giving are in line with the Fair
Tax. Under the Fair Tax, homebuilders would no longer have to include
the cost of tax compliance (income tax, payroll tax, tax depreciation
schedules etc.) in a home's final cost. Also, the purchase of building
materials would be tax-free, further reducing home prices. Allowing
individuals to take home their gross pay without income tax or payroll
tax withholding would ease the process of saving for home ownership.
Charitable giving would also do well under the Fair Tax. The general
economic benefits[^1] that a switch to the Fair Tax would bring do the
most to increase citizen's abilities to donate.

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

NSBA members consistently list compliance with the Internal Revenue Code
as their most burdensome interaction with the federal government.
Because of their size, small business owners are disproportionately
impacted by costly and complicated tax requirements. A switch to the
Fair Tax would greatly ease the paperwork and regulatory burden and cost
faced by business owners.

Under the current system, self-employed small business owners are
required to pay both sides of the payroll tax (15.3%) on themselves and
half (7.6%) for their employees. As payroll taxes are due regardless of
a businesses income, early startups face a high fixed tax liability when
they need cash the most. Payroll tax administration also is onerous
enough (and penalties for mistakes high enough) that most small business
owners outsource the task, adding to the cost of doing business. The
Fair Tax would eliminate payroll taxes, thus easing business formation
and encouraging the hiring of employees.

The Fair Tax would free small business owners from a variety of other
forms of costly tax compliance. Income tax withholding, depreciation
schedules, records of expenses, complicated pension and deferred
compensation rules would all be eliminated. Owners would be able to
focus on running their business and not on complicated accounting
procedures.

Consumers also would benefit as business owners would no longer have to
include the cost of tax compliance and burden in product pricing.
Economist Dale Jorgenson has estimated that the hidden cost of tax
compliance embedded in products cost is equal to 20-30% of a product's
total cost.[^2]

Contrary to opponent's arguments that claim the Fair Tax would harm
elderly and low-income individuals, the system would actually place
these individuals in great control over how much they actually pay in
taxes. The Fair Tax includes a rebate system where all valid Social
Security beneficiaries receive a rebate equivalent to the tax paid on
essential goods and services. This rebate will be paid in advance, in
equal installments each month. The size of this monthly rebate will be
determined by the government's poverty level for a particular household
(defined as one or more individuals), multiplied by the tax rate.

**III. Conclusion**

The members of the National Small Business Association believe that the
current federal tax code is broken beyond repair. Fundamental reform in
the form of the Fair Tax is the best way to proceed.

The Fair Tax is transparent, allowing consumers to actually see the cost
of government. The Fair Tax's simplicity allows business owners to focus
on growing their business rather than complying with complex tax rules.
Switching to the Fair Tax will eliminate inequities embedded in the
current code that hinder an owner's participation in pension plans,
health care plans and the ability to pass a family business to the next
generation.

The National Small Business Association looks forward to working with
the president's Advisory Panel on Federal Tax Reform and Congress to
pass meaningful fundamental tax reform embodied in the Fair Tax.

[^1]: The Economic Impact of Taxing Consumption, Dale Jorgenson, Ph.D.,
    Harvard University, Testimony before the Ways and Means Committee,
    March 27, 1996.

[^2]: The Economic Impact of the National Retail Sales Tax, Dale
    Jorgenson, Harvard University, November, 1996.