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April 11, 2000, Tuesday

SECTION: PREPARED TESTIMONY

LENGTH: 2478 words

HEADLINE: PREPARED TESTIMONY OF Herman Cain

BEFORE THE HOUSE WAYS AND MEANS COMMITTEE

SUBJECT - CONSUMPTION-BASED TAX REFORM

BODY:
Thank you Mr. Chairman and members of the committee. I appreciate the opportunity to testify before your committee about fundamental tax reform. I am Chairman of Godfather's Pizza, Inc.

The current tax system is broken and no amount of tinkering around the edges is going to fix it. It is too complicated. It is too unfair. It holds people down economically. It destroys hope and opportunity. It needs to be replaced.

A replacement system should satisfy six principles. First, it should promote economic growth by reducing marginal tax rates and eliminating the tax bias against savings and investment. Second, it should promote fairness by having one tax rate and eliminating all loopholes, preferences and special deductions, credits and exclusions. Third, it should be simple and understandable. Fourth, it should be neutral rather than allowing the government to manipulate and micromanage our economy by favoring some at the expense of others. Fifth, it should be visible so people understand their actual tax burden and so it clearly conveys the true cost of government. Sixth, it should be stable rather than changing every year or two so people can plan and so the system remains simple and understandable. In my view, there is more than one plan that would satisfy these principles to varying degrees. There is more than one way to vastly improve over the current tax system. One proposal that would be highly constructive is the flat tax. It would improve the tax system in all six areas. I, however, have concluded that the FairTax, introduced on a bipartisan basis by Reps. Linder and Peterson as H.R. 2525, meets the six principles that I outlined.

The FairTax would repeal individual income taxes, corporate income taxes and the estate and gift tax. It is the only proposal to repeal all payroll taxes (including Social Security, Medicare and self- employment taxes). These taxes are a regressive tax on jobs and upward mobility and it is time to address them. The FairTax would replace these taxes with a 23 percent national retail sales tax on all goods and services sold to consumers.

Individuals would no longer file tax returns. April 15th would be just another day. Businesses would collect and remit the sales tax. In addition, the FairTax would provide every household in America with a rebate of sales tax paid on necessities.

The FairTax would encourage Economic Growth

A national retail sales tax would significantly enhance economic performance by improving the incentives for work and entrepreneurial activity and by raising the marginal return to saving and investment. Entrepreneurs and small business owners would be given greater access to capital, the life blood of a free economy. Investment would rise, the capital stock would grow, productivity would increase and the output of goods and services would expand. The economy would create more and better paying jobs for American workers and take-home pay would increase considerably.

Although the magnitude of the economic growth generated by a flat rate, neutral tax system causes lively debate among economists, virtually all agree that the large marginal tax rate reductions in the FairTax combined with neutral taxation of savings and investment, will have powerful positive effects on the economy.

The FairTax would be Fair

The FairTax would provide every household in America with a rebate of sales tax paid on necessities. Thus, the FairTax is progressive and every family is protected from tax on essential goods and services. Because of the rebate, those below the poverty line would have negative effective tax rates and lower middle income families would enjoy low effective tax rates.

The burden of paying the FairTax is fairly distributed. It is, in fact, much more fairly distributed than the income tax. Wealthy people spend more money than other individuals. The FairTax will tax them on their purchases and as a result, they pay more in taxes. If, however, they use their money to build job creating factories or stores, or to finance research and development to create new products, (all of which help improve the standard of living of others), then those activities will not be taxed. The FairTax is premised on the notion that it is fairer to tax individuals when they consume for themselves above the essentials of life, rather than when they invest in others or contribute to society.

The FairTax in effect gives a supercharged charitable contribution deduction because people can give to their favorite charity free of any income tax, payroll tax or sales tax. The charitable deduction today allows people to make their contributions with pre income tax dollars (but after payroll tax dollars). For the three-quarters of Americans that do not itemize, most must today earn $155 to give $100 to their favorite charity or to their church.' Under the FairTax, they must earn only $100 to give $100 since under the FairTax what you earn is what you keep and charitable contributions are not taxed.

Education is one of the keys (along with savings and hard work) to an improved standard of living. That certainly was true in my case. The FairTax is education friendly and is dramatically more supportive of education than current law. The FairTax embodies the principle that investments in people (human capital) and investments in things (physical capital) should be treated comparably. The current tax system, in stark contrast, treats education expenditures very unfavorably.

Education is the best means for the vast majority of people to improve their economic position. It is the most reliable means that people have to invest in themselves and improve their earning potential. Yet the tax system today punishes people who invest in education, virtually doubling its cost. Only the FairTax would remove this impediment to upward mobility. No other tax reform plan would do so.2

Today, to pay $ I 0,000 in college or private school tuition, a typical middle class American must earn $15,540 looking only at federal income taxes and the employee payroll tax) The amount one must earn to pay the $10,000 is really more like $20,120 once employer and state income taxes are taken into account?

The FairTax does not tax education expenditures. Education can be paid for with pre-tax dollars. This is the equivalent of making educational expense deductible against both the income tax and payroll taxes today. Thus, under the FairTax, a family will need to earn $10,000 to pay $10,000 in tuition, making education much more affordable (not considering state income taxes on education). The FairTax makes education about half as expensive to American families compared to today.

The FairTax would improve upward mobility but no longer punishing work, savings, investment or education. It would better enable people to improve their lives.

It would no longer hold people back.

The FairTax would be Simple

The FairTax is a simple tax. Individuals who are not in business would have absolutely no compliance burden, nor would they be subject to the discretionary interpretation of the current convoluted tax code. As for businesses, it puts much fewer administrative burdens on businesses. In fact, filling out a FairTax return is comparable to filling out line one (gross revenue) of an income tax return. There would be no more alternative minimum tax, no more depreciation schedules, no more complex employee benefit rules, no more complex qualified account and pension rules, no more complex income sourcing and expense allocation rules, no more foreign tax credit, no more complex rules governing corporate acquisitions, divisions and other reorganizations, no more uniform capitalization requirements, no more complex tax inventory accounting rules, no more income and payroll tax withholding and the list goes on. Businesses would simply need to keep track of how much they sold to consumers.

Compliance costs will, therefore, fall under the FairTax. Today, according to the Tax Foundation, we spend about $250 billion each year filling out forms, hiring tax lawyers, accountants, benefits consultants, collecting information needed only for tax purposes and the like. These unnecessary costs amount to about $850 for every man, woman and child in America. To the extent these costs are incurred by businesses, they must be recovered and are embedded in the cost of everything that we buy. The money we spend on unnecessary compliance costs is money we might as well burn for all of the good it does us. The Tax Foundation has estimated that compliance costs would drop by about 90 percent under a national sales tax.

The FairTax would be Neutral

Under the FairTax all consumption would be treated equally. The tax code punishes those that save and rewards consumption. Under the FairTax, no longer would the tax system be in the businesses of picking winners and losers. The tax code would be neutral in the choice between savings and consumption, neutral between types of savings and investment and neutral between types of consumption.

The FairTax would be Visible The FairTax is highly visible, and because there is only one tax rate Congress would be raising the rate on all taxpayers at the same time. Moreover, all citizens would be subject to the tax increase, not just a targeted few. It will be much harder for Congress to adopt the typical divide-and-conquer, hide-and-disguise tax increase strategy it uses today. The FairTax would explicitly state the contribution to the Federal government each and every time a good or service is purchased.

The FairTax would be Stable

The FairTax would be more stable than the present system for two reasons. First, because it is so simple and transparent, it would not invite tinkering in the way that the current system with its thousands of pages of code and regulations does. People will resist attempts to make it more complex and attempts to favor special interests because they will understand what is going on. Second, taxing consumption is a more stable source of revenue than taxing income. There are fewer ups and downs in the consumption base.A recent study showed that for the years 1959 to 1995, the FairTax base was less variable than the income tax base. Why? When times are unusually good, people will usually save a little more. People tend to smooth out their consumption over their lifetime. They borrow when young, save in middle age and spend more than their income in retirement.

Impact on Restaurants and Retailers

I would like to discuss briefly the impact of the FairTax on my industry, restaurants in particular and retailers in general. The FairTax could have a positive impact on these industries.

Like other firms, retailers will enjoy a zero corporate tax rate and their shareholders will not be taxed on dividends received from the retailer or capital gains on their investment in the retailer. Compliance costs could be lower. Moreover, over time, most states will conform their sales taxes to the federal sales tax, reducing the costs of complying with multiple rules in each state and their political subdivisions.

If people are willing and able to purchase more goods and services in a healthy economy, then they will spend more money at retailers and eat out more. There is nothing that hurts restaurants more than a slow economy and nothing that helps them more than a good economy. In this sense, the FairTax could help restaurants and retailers.

Consumption is taxed once under both an income tax and a national sales tax. Consumption purchases must be made from after-income-tax and after-payroll-tax dollars today. The primary difference between a sales tax and an income tax is that the income tax double or triple or quadruple taxes on savings. Consumers will see their paychecks increase by nearly two trillion dollars. Since the FairTax is not a tax increase but is revenue neutral, the repeal of the income and payroll taxes will provide consumers with the money necessary to pay for the sales tax.

Instead of having to comply with the complexities of the income tax, payroll tax, and various other taxes, there will be one sales tax on all goods and services. The firm will simply need to calculate on a monthly basis its total retail sales. Retailers will receive an administration fee for complying with the sales tax. The fee is equal to 1/4 of one percent of the revenues collected and remitted.

In summary, this is what the Fair Tax could mean for retailers:

No more No more No more No more No more No more No more uniform inventory capitalization requirements; complex rules governing employee benefits and retirement plans; tax depreciation schedules; complex tax rules governing mergers, acquisitions and spin-offs; international tax provisions; income tax or payroll tax withholding; employer payroll tax; and No more corporate tax.

I would also point out that restaurants in particular have grave concerns that any national sales tax would treat restaurant food differently from food purchased at a grocery store. Food consumed away from home is no longer a luxury, it is an essential part of the American lifestyle. The FairTax would not discriminate between the two.

Conclusion

People want to be able to dream and to pursue their dreams. As Dr. Benjamin E. Mays, late President Emeritus of Morehouse College said, "It isn't a calamity to die with dreams unfulfilled but it is a calamity not to dream." The current tax system not only destroys the ability of people to achieve their dreams, it causes many people to give up dreaming altogether.

We need a better tax system -- a tax system more appropriate for a free society. The current tax code can not be reformed to achieve the stated objectives, it MUST be replaced. Please use the power of the Congress to correct a tax code that has simply gotten out of control and taken away people's freedom.

FOOTNOTES:

1 $155.40 less 7.65 percent in employee Social Security I$1 I 89) and Medicare payroll taxes less 28 percent in federal income taxes ($43.51) leaves S I 0.000

2 Neither the fiat tax nor the USA Tax would remedy the current bias against education.

3 $15,540 less 7.65 percent in employee Social Security ($1.189) and Medicare payroll taxes less 28 percent in federal income taxes ($4,351) leaves 511).l)00

4 Economists generally agree that the employer share of payroll taxes is borne by the employee in the form of lower wages. This figure assumes that employees bear the burden of the employer payroll tax and that they are in a seven percent state and local income tax bracket. $20,120 less $5,634 in income tax (28 percent), $3079 in payroll taxes (15.3 percent) and 51.408 in state and local income taxes (7 percent) leaves $10,000.

END

LOAD-DATE: April 13, 2000

Document 18 of 54.


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