ONE OF the best reasons for voting for President Bush this fall slipped quietly under the radar. In his convention speech, Bush promised, "I will lead a bipartisan effort to reform the tax code." Bush offered few details to what he would do with tax reform, understandably. Republicans did not want tax reform to be misrepresented and demagogued as was every other element of the president's agenda.
But, now that Bush is in office for another four years with solid majorities in Congress, it's safe to talk about it again.
There are two proposals for tax reform currently on the table: a flat tax and a consumption tax as enshrined in the Fair Tax Act. The fair tax plan is the one with the most momentum behind it, with 57 congressional backers including Speaker of the House Dennis Hastert, who endorsed the plan in his recent book "Speaker."
The fair tax plan is essentially a national consumption tax -- what other countries like Great Britain have in the Value Added Tax. The fair tax plan calls for a 23 percent tax on all goods and services paid by the consumer. The plan would also rebate the cost of the tax on spending at the poverty line for all families, ensuring that no family is paying taxes on necessities, and families below the poverty line are actually paying negative tax.
Opponents attack the fair tax plan for being regressive. Perhaps the sound of the words "sales tax" elicits the knee-jerk "regressive!" charge from reactionary liberals, but the fact is, no tax could be less regressive than the fair tax. Under the current system, wage earners, including those below the poverty line, are subject to the truly regressive payroll taxes. The fair tax not only eliminates all payroll taxes; it also refunds, in the form of a monthly check from the government, all tax on necessities .
For example, the tax on a married family of four at the poverty level would average $5,175. Therefore, every family of four would receive a monthly rebate amounting to an annual $5,175, so that only spending on non-necessities would ever be taxed.
One reason the fair tax seems regressive is because the true cost of our current tax system is already buried into the cost of a good, hidden beneath layers of capital and labor costs paid by the producer of that good. The fair tax reduces the marginal tax rate on labor and capital to zero, which should lower the base price of goods. Since workers will take home 100 percent of their paycheck, and prices, with the hidden taxes gone, will stay about the same, the average American will enjoy much greater purchasing power, and especially the poor.
One hidden cost of the current tax system is the immense burden of tax code compliance. Americans spend billions of dollars and millions of hours every year to prepare their taxes. In this way, the fair tax would improve the economy simply by freeing up the resources currently put toward tax preparation. The fair tax requires no record keeping, no forms and best of all, no IRS.
Another problem with the thousands of pages of current tax code is that they contain countless complicating loopholes and deductions. Politicians like being able to control behavior with the tax code, but every deduction has to be made up for by another tax-paying American. The consumption tax has no loopholes nor deductions, thus more fairly distributing the burden of taxation.
One of the best arguments for a consumption tax, though, is what it will do for exports. Currently, everything America exports contains the hidden cost of taxes paid by the company that produced the product. In nations with a consumption tax, that tax disappears once the product leaves the border. But in American products, the tax stays, artificially inflating the cost of American goods and reducing demand for them abroad. Similarly, when foreign goods enter the United States from a country with a consumption tax, the price is artificially lower than American goods with an embedded tax.
The fair tax plan would close all loopholes and create a truly level playing field for companies severely handicapped by America's outdated tax rules, increasing economic output and manufacturing jobs while reducing America's grievous trade deficit.
America desperately needs a tax code that encourages saving, doesn't penalize success and creates a level playing field for American businesses internationally -- a code that's simpler and fairer for all involved. It's time for the president to put the full weight of his re-election mandate behind the fair tax proposal.
Herb Ladley's column appears Fridays in The Cavalier Daily. He can be reached at hladley@cavalierdaily.com.
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