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April 11, 2000, Tuesday

SECTION: PREPARED TESTIMONY

LENGTH: 1351 words

HEADLINE: PREPARED TESTIMONY OF THE HONORABLE JOHN LINDER

BEFORE THE HOUSE COMMITTEE ON WAYS AND MEANS

BODY:
Thank you Mr. Chairman and members of the committee. I appreciate the opportunity to testify today about H.R. 2525, the FairTax Act of 1999, which I introduced along with Collin Peterson earlier in this Congress. Mr. Chairman, I ask that my written statement and a series of articles discussing the FairTax be made a part of the record.

The FairTax Act would repeal all individual income taxes, corporate income taxes, payroll taxes, self-employment taxes, capital gains taxes, and death and gift taxes. It would replace these with a 23 percent national retail sales tax on all new goods and services sold to consumers. All sales of new goods and services to consumers would be taxed once and only once, without any exceptions. Business inputs would not be taxed since those items will ultimately be taxed when they are sold to consumers, thus adhering to the principle that goods be taxed once and only once. Because there are no exceptions to the FairTax, and because we realize that those Americans at the low end of the income scale spend a higher proportion of their income, the FairTax provides every household in America with a rebate of the sales tax paid on necessities. Thus the FairTax is progressive, and every family is protected from tax on essential goods and services. The rebate would be paid monthly in advance in an amount equal to the sales tax rate multiplied by the federal poverty level--that level of spending literally defined by the U.S. government as required to purchase necessities. For a family of four, the rebate level is $22,500--meaning that every family of four will receive a check at the first of each month for $431.25, the amount that family would pay in taxes on monthly poverty level spending. If you spend more than the poverty level, you pay the sales tax. If you spend less than the poverty level, you get to keep the rebate check anyway.

It would be a mistake to emulate the states' attempt to achieve sales tax progressivity by exempting various categories of goods or services from tax because that methodology doesn't achieve progressivity at all. For example, affluent people buy more expensive food, housing and clothing than do poor people, so when these categories of goods are exempted, affluent people benefit disproportionately. In addition, these exemptions add complexity and compliance costs to the system, and lead to outrageous results. In any New York bagel shop, for example, a plain bagel is tax-free but a bagel with cream cheese is taxable. Moreover, any one exception to the sales tax will inevitably lead to efforts to exempt other products. Not only would those efforts lead to a perversion of the sales tax just as lobbying today has perverted the income tax, but also when some goods or services are exempted, a higher tax rate must be charged on those things that remain taxable to maintain the same level of revenue. Such a preferential scheme is bad as a matter of economics and unfair to those companies and workers who make the goods that remain taxable.

The FairTax will end the complexity of compliance with our current system. Today, according to the Tax Foundation, we spend about $250 billion each year filling out forms, hiring tax lawyers and accountants and collecting information needed only for tax purposes. These unnecessary costs amount to about $850 for every man, woman and child in America. To the extent these costs are incurred by businesses, those businesses hide them in the cost of everything that we buy. The Tax Foundation has estimated that compliance costs would drop by about 90 percent under a national sales tax. Why? Because the present system requires that Americans must provide over one billion information returns to the IRS annually. Americans file a quarter billion tax returns annually. Under the FairTax, this would be an unpleasant memory.

The FairTax would be collected by states and retailers just as current state sales taxes are. The FairTax gives retailers a 25 basis point commission for collecting the tax and offers state sales tax authorities another 25 basis point commission to administer the tax. We believe that it makes the most sense for state civil servants that have years of experience administering a sales tax to take that job. The FairTax would then dismantle the IRS and create a sales tax bureau in the Treasury to administer the collection of sales tax from the states. The only tax collector that the consumer would ever see is the smiling face behind the register at the local grocery store.

Beyond simplicity, the FairTax holds the promise of economic growth and a higher American standard of living. The FairTax would stop the punitive taxation of work inherent in the income and payroll tax and end the multiple taxation of savings and investment. The FairTax would end the bias against investment in education. Economists anticipate the FairTax, because it is neutral toward savings and investment, will lead to much higher levels of savings and investment which in turn will lead to greater productivity and output. Dr. Dale Jorgenson of Harvard and Dr. Laurence Kotlikoff of Boston University estimate, in two separate studies, that the FairTax would increase GDP between 7 to 14 percent over the current system. While clearly not endorsing the FairTax specifically, even our current Treasury Secretary, Dr. Larry Summers, concluded in some of his academic writings that a complete shift to consumption taxation might raise steady-state output by double digits.

Why is such growth predicted? Because by giving Americans their entire paycheck, American consumption is increased. And, by untaxing our business and corporations, American businesses will become more competitive with foreign businesses. Consider the recent WTO ruling that found the Foreign Sales Corporation (FSC) export incentives to be a violation of WTO rules. Congress created FSCs with the knowledge that our current tax system was undermining our ability to compete abroad. The FairTax would solve this problem by removing the current tax burden on American production and allowing American goods to be sold overseas with no tax consequences embedded in the price. Further, the FairTax would apply to all imported goods sold in America. In contrast, today foreign goods enter the U.S. market free of any significant tax burden. This places U.S. produced goods at a big competitive disadvantage. This disadvantage is made worse because most of our major trading partners eliminate a big part of their tax burden on exports since their value added taxes are border adjusted. They impose a large VAT on U.S. goods imported into their country. This disadvantage is built into our tax system, and it exports high paying U.S. jobs to our foreign competitors.

Unlike our perversions of the income tax, the FairTax is in compliance with the WTO rules because it is an indirect tax, it. For the first time, American businesses and American workers will be competing on a level playing field with our foreign competitors.The FairTax is simple, understandable and transparent. People understand the FairTax. They don't understand the present tax system. Even tax professionals and tax administrators don't understand the present system. Moreover, today a huge proportion of the overall tax burden is hidden from the ordinary taxpayer's view and passed on to those who can least afford it. Under the FairTax, people will for the first time actually understand their tax burden and have confidence that their fellow citizens are bearing their fair share.

Mr. Chairman and members of the Committee, the present system is broken beyond repair. It is costing the American people dearly in terms of opportunities lost and a lower standard of living. It is time to start over. I believe that the FairTax--as the only proposal today that ends the regressive payroll tax and allows American workers to compete fairly with our foreign competition--represents the best alternative to the present system. I think that after you study the plan you will agree.

Thank you.

END

LOAD-DATE: April 12, 2000

Document 23 of 46.


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