The Fair Tax
Asked about HR25 during the 2004 Presidential campaign, Democrat Senator John Kerry did not know what it was, or was unwilling to say he did. Queried similarly, however, President Bush immediately knew what it was. This may indicate little, but it does suggest,
as Speaker Hastert wrote in his book published in 2004, that a major overhaul of the federal tax system is high on the Republican agenda for a second Bush term.
The proposal involves an elimination of the IRS, together with the income tax, withholding, social security, medicare and medicaid, and replacing it all with a 17 % national sales tax. Supporters say it would be revenue neutral at that rate. The opposition has yet to even recognize the battle, but it will come, and there is no way to know just what version of such a proposal would come out of the U.S. Congress. It would mean sweeping changes in our tax structure obviously, but in spite of what the opposition may eventually raise in objection, such a proposal would be a mammoth boom to the American economy and make the tax structure eminently fairer and productive.
The initial impact would be, of course, the elimination of the IRS, which some jovially refer to as the greatest terrorist organization in the world. Simply this move, if it could be accomplished, would free up much economic spirit. Current employees at IRS would have to get real jobs. But there would be increased demand for services they might be well schooled at providing, in accounting and so forth, on the geometric economic growth such changes would engender. This might also be one of the greatest obstacles to success in effecting such change. It is nigh impossible to end a government bureaucracy, and the IRS is not just 'another' government bureaucracy. But the national sales tax would be collected by the retailers or similar point of sell entities, and forwarded to the federal government by the states, eliminating the current role and function of IRS. To whatever extent such an agency was still needed, it could be much smaller, more streamlined, and repressive. The resultant bureaucratic structures would be entirely different and much less intrusive than IRS, although many states might have to increase the level of their tax collection operations.
Opposition to such an overhaul of the tax structure is going to be vehement, if ill founded.
This reformation of the tax code would make tax structure in this country much more of a consumption tax than an income tax. That implications of that are far reaching. As such, it would stimulate savings and thereon, investment, creating a real impetus for economic growth and development. But it would also mean the effective elimination of corporate taxes and capital gains taxes as separate entities. Opponents will cry foul, with the usual rhetorical outcry about tax cuts for the evil rich. It is true that the top 5 % of income earners in the U.S. today pay 67 % of the taxes. That is why such a plan is so important. It would free up tremendous amounts of capital for wealth creation. It would also effectively reduce the highest marginal tax rate from around 39 % to 17 %.
Ending corporate taxes would be an immediate plus for consumers (and for all points of the supply chain in purchase of the materials for production) since businesses, experiencing a reduced cost of operation on lower taxes and lower prices would be able to, would be forced to, lower their prices. This alone would stimulate economic activity. Across the board, with lower costs, lower prices would result. And consumers, with fatter wallets on the termination of withholding and other deductions - capped by an increase in income to them on the receipt of the matching contribution no longer going from employer to social security -- would have more to spend in their pockets. Reducing corporate taxes would also make FDI into the US more attractive and be a disincentive for business to outsource beyond our borders.
The history of the twentieth century resounds with the record of tax changes. Whenever we have cut taxes, the government has garnered increased tax receipts. When it has increased tax rates, that did not happen as it was expected to by the proponents of tax increases. This was the case made by Kennedy, by Reagan, and by W. Bush. Reagan's tax cut program, indeed, reducing the highest marginal rates from 79 % to 29 %, lead to an increase in government receipts unparalleled in history. In 1981, the federal budget was in the realm of $500 billion. It is now over $ 2.5 trillion. In twenty years, it has increased five fold. The previous twenty years, with much higher marginal tax rates, saw an increase from $100 billion in 1961 to the $500 billion in 1981, and that does not segregate out the social security budget which was separate in 1961, but not in 1981. This is why around the world, nation after nation has undertaken the slashing of high marginal tax rates, and with similar results.
It is not a partisan matter, either, although while JFK seemed to understand, his brother, Senator Edward Kennedy, does not seem to get it. Democrat Governor in New Mexico, Bill Richardson, is slashing taxes on this evidence, while Bush 41 once termed Reagan's suggestion of this phenomenon as voodoo economics.
Consider the evidence. When LBJ had a 10 % surtax enacted in 1968, the deficit soared.
But when that surtax was 'expired' the following year with Nixon, the budget went into a state of balance. Of course, there were other factors, such as impoundment, but it was a major reason in the budgetary change.
Clinton is said to have produced a balanced budget by 1998 on tax increases, but that is not precisely the entire story. Had Clinton been successful in winning approval of his programmatic agenda, government spending would have soared and so would have deficits.
There was, though, a change to a fiscally more responsible Republican Congress in 1995 which held down the growth of spending. Clinton proposed massive cuts in defense. The Savings and Loan bailout turned from being a pull on revenue to a contributor of revenue.
The economy turned around and tax collections increased, in good part due to Greenspan at the Fed, who in 1992 cut the reserve requirement and more. The stock market began to climb and interest rates, which had been rising, came back down after the Republican Revolution of taking Congress in 1994, as well, and that closed the deficit, too.
Similarly, the deficit has soared since 2001, but that is attributable to the Clinton recession and the war on terror and runaway spending by Congress, among other factors. The Bush tax cuts are beginning to turn the deficit in the other direction as they stimulate the economy, as well.
The Clinton recession is also in part attributable to the Clinton/Reno Justice Department assault on Microsoft, which shattered tenuous stocks pulling the plug on the NASDAQ and reverberating through Wall St, the Dow Jones, and the entire economy.
But, we should not forgot the election campaign of 1996. Republican Steve Forbes was one of many warning that the Clinton tax increases had to be reversed or we would face a recession. The platform of Bob Dole and Jack Kemp similarly suggested the need for tax cuts. But, Clinton got a second term beginning in 1997, his tax increases remained on the books, and by 1998, we were heading into a recession. But who remembers that? We keep hearing of the boom of the Clinton 90's. The prosperity was on previous policies, and the Clinton programs caused the downturn.
All of that will not dissuade opponents of the proposed changes in the tax code, as represented by HR25. They, against the evidence of history, will bemoan the tax cuts for the rich and the 'transfer' of the tax burden to the poor, without regard to the impact of these policies on economic performance. There will be some shock involved when consumers must ante up an additional 17 % at the cash register, but they will have lower prices and more money to spend to compensate. The change will also reap tax payment from many who have in part, at least, eluded the income tax, from the underground economy to less suspect sidestepping of tax payment.
There is no way to foresee what will come out of the Congress. It may look quite different from what has been proposed, and the impact on the economy may be quite different on those differences from what we can see on this proposal. They may see fit, in their political battles, to place the national sales tax on wholesale transactions, with negative impacts on the progressive mentality of such a measure. We cannot know what they may do. As it is proposed now, however, the suggestion that 17 % would be revenue neutral, replacing current receipts for income, social security, medicare, and medicaid taxes -- which it will be suggested will not be the case but will result, it will be said, in less revenue and bigger deficits and necessary cuts in government programs, spending, and services -- would not be what we would see. A 17 % national sales tax would so stimulate the economy that government revenues would soar on it, in very short order. Indeed, it may be the measure to 'save' social security, on top of everything else.
It may not come to fruition, but do not underestimate George W. Bush. He has had substantial success in winning his legislative agenda. This change, were it to be enacted,
would be revolutionary in its impact on the economic prospects of the U.S. and the world in the years ahead. What is the downside of this proposal? TAINTONE! It is all positive, despite the rhetorical bursts we will be subjected to from the left. He wants a freer world and economy. Here is a major step in that direction.