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Document 17 of 54.

April 11, 2000, Tuesday

SECTION: PREPARED TESTIMONY

LENGTH: 1214 words

HEADLINE: PREPARED TESTIMONY OF DAVID R. BURTON

BEFORE THE HOUSE WAYS AND MEANS COMMITTEE

SUBJECT - CONSUMPTION-BASED TAX REFORM

BODY:
I am David R. Burton, President of the Prosperity Institute. I am pleased to submit this testimony on behalf of the Prosperity Institute. We would like to take this opportunity to present our analysis of the impact of the leading national sales tax plan on senior citizens. This plan is called the FairTax.

Senior citizens are becoming a larger portion of the overall population. In 1970, those over 65 years of age were 9.8 percent of the population. By 1999, seniors were 12.7 percent of the population. In 2015, seniors will account for 14.7 percent of the population and in 2020, they will account for 16.6 percent.l Under the FairTax, senior citizens, like others, will receive a cash rebate effectively exempting consumption up to the poverty level from tax. The sales tax rebate is equal to the sales tax that would be paid on expenditures up to the federal poverty level. Because the federal poverty level for two persons is not twice the level for one persons, the FairTax provides that married couples would receive an extra rebate amount to prevent any marriage penalty. The rebate is paid monthly in advance. Thus, poor seniors will pay no sales tax. A household spending twice the federal poverty level (or more in the case of a married couple) would pay an effective tax rate of 11 1/2 percent.

Because income and payroll taxes are embedded in the price of everything we purchase, it is not clear that prices, even including the sales tax, will increase by very much.' They may not increase at all because pre-sales-tax prices may fall once the income and payroll taxes are repealed. Nevertheless, the FairTax makes sure that the Social Security benefits indexing formula would be adjusted so that benefits will increase to the extent, if any, that the sales tax results in higher tax inclusive prices. The income tax imposed on Social Security benefits will be repealed.

The income tax imposed on investment income and pension benefits or IRA withdrawals will be repealed. Pensions funds, IRAs and 401(k) plans have assets of well over $11 trillion.3 An income tax deduction was taken for contributions to most of these plans and the earnings on these plans.have accrued free of any income tax. All beneficiaries and owners of these plans expected to pay income tax on them upon withdraw and would not be required to do so since the income tax would be repealed by the FairTax.

Repeal of the corporate and individual income tax and the estate and girl tax will have a substantial positive impact on the stock market.4 Those seniors that own stocks either directly or through mutual funds, Individual Retirement Accounts, 401 (k) plans or otherwise will experience significant gains. More seniors own stocks, mutual funds or have IRAs than other age groups.5 In addition, unrealized capital gains that would have been subject to the income tax when realized will no longer be taxed.

The FairTax imposes a sales tax on newly constructed homes but exempts existing homes and other used property from any sales tax. Currently, equity payments on homes must be paid from after-income tax earnings (i.e. principal payments are not deductible). The purchase of existing housing is thus subject to the income tax. Owners of existing homes may experience large gains due to the repeal of the income tax and implementation of the FairTax. Seniors and those nearing retirement age have dramatically higher homeownership rates than other age groups. (80 percent compared to 66 percent on average).6 Homes are often a family's largest asset.

Under the FairTax, the estate and gift tax would be repealed. The need for small businesses and farmers to engage in expensive estate planning, involving attorneys, complex estate freeze transactions and expensive life insurance plans in anticipation of future estate and gift tax liability would disappear. Heirs would no longer need to sell the business or farm out of the family or borrow heavily, putting the business at risk, to pay the estate tax.

Replacing the current tax system with a national sales tax would make the economy much more dynamic and prosperous.7 Budget pressure on entitlement spending, already significant, will become much more pronounced once the baby boom starts retiring. The economic growth a sales tax would cause would make it substantially less likely that federal budget pressures will result in Medicare or Social Security benefits reductions.

According to work by Stanford University economist Joseph Kahn, those seniors with a net worth over $400 thousand (nearly four times the median) may see a reduction in their purchasing power. The largest decline in purchasing power, about 3.5 percent, is for those with net worth above about $700 thousand. The primary reason for this effect is that wealth spent for consumption purposes that is held in non-tax deferred accounts like IRAs will be taxed when spent under a sales tax and would not be taxed further under an income tax.8 Kahn assumes, contrary to Jorgenson, that prices will rise.

Most seniors will be better off were the FairTax to replace the current system.

FOOTNOTES:

1 Middle Series, U.S. Bureau of the Census, Statistical Abstract of the United States, 1996, Tables 814 and 17, pp. 15 and 17.

2 Dale W. Jorgenson, Economic Impact of the National Retail Sales Tax, National Tax Research Committee, generally showing that producer prices will fall 20 to 30 percent because of the repeal of income and payroll taxes.

3 Statistical Abstract of the United States, 1998, Tables 845-847, pp. 533-534. In 1997, private pensions had assets of $4,846 billion and state and local pension funds had assets of $2,100. In 1996, Individual Retirement Accounts had assets of $1,347 billion. In 1997 section 401(k) and other defined contribution plans had assets of $1,730 billion.

4 In short, by repealing the corporate tax, the tax on dividends and the tax on capital gains, the net of income tax future income stream of corporations will increase and the capitalized value of the that future income stream will increase as well.

5 U.S. Bureau Labor Statistics, Statistical Abstract of the United States, 1998, Table 798, p. 514.

6 Statistical Abstract of the United States, 1999, Table 1215, p. 726.

7 "The Economic Impact of Replacing Federal Income Taxes with a Sales Tax", Laurence J. Kotlikoff, April 15, 1993, Cato Institute Policy Analysis; Dale W. Jorgenson, Economic Impact of the National Retail Sales Tax, National Tax Research Committee. See also, "The Economic Impact of Fundamental Taxing Consumption", Dale W. Jorgenson, Testimony before the House Ways and Means Committee, March 27, 1996 and "The Economic Impact of Fundamental Tax Reform", Dale W. Jorgenson, Testimony before the House Ways and Means Committee, June 6, 1995; "Looking Back to Move Forward: What Tax Policy Costs Americans and the Economy," Gary Robbins and Aldona Robbins, Policy Report No. 127, September 1994, published by the Institute for Policy Innovation; "Replacing the Federal Income Tax with a Consumption-Based Tax System", prepared by Nathan Associates for the National Retail Institute (1996).

8 "Examining a Change to a National Retail Sales Tax Regime: Impact on Households," November 1996.

END

LOAD-DATE: April 13, 2000

Document 17 of 54.


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