Farm Bureau, Tax Reform
and the 106th Congress

Farm Bureau policy supports replacing the current federal income tax system with a new code that encourages savings, investment and entrepreneurship, that is also fair to agricultural producers. Such a system could be based on a flat income tax or a national sales tax.

Tax reform plans for either a flat income tax or a single-rate national sales tax have been in existence for several decades. Several bill have been introduced and debated in the 106th U.S. Congress and will most likely continue into the 107th Congress as well.

The Hall/Rabushka Model

Tax reform and the concept of a flat income tax or national sales tax has been in the news since 1981. At that time Professors Robert Hall and Alvin Rabushka introduced their highly proclaimed flat-tax plan. It became a published book in 1985, entitled The Flat Tax, with a second edition printed in 1995.

Under this plan, all income would be taxed once and only once, at a uniform low rate of 19 percent. It permitted a tax-free allowance of $25,500 for a family of four. Their tax eliminated many of the distortions of the present tax system, adhering to the principle of a consumption tax. Individuals are taxed on the basis of what they take out of the economy (consumption spending), not what they put in (savings and investments).

Even today, the tax reform plans in Congress (both flat-tax and national sales tax) are loosely based on this same model principle.

Hall and Rabushka believed that a flat-tax was fair for many reasons, among them:

• A single flat rate – income or sales are taxed at one low rate.
• No bias against savings and investment – the current tax code’s bias against capital formation in the form of either a capital gains tax or estate tax would be eliminated.
• Equality – the tax code would be changed so that all taxpayers would be treated the same under the law.
• Simplicity – in the simplest form, the flat income tax could be figured out and sent in on a postcard.

Flat Income Tax or Single-Rate Sales Tax?

FB policy does not favor one type of flat-tax (income or retail sales) more than the other, but does state that:

• FB could support any flat tax proposal not based on gross revenue received, and/or
• A consumption (sales) tax must not tax business-to-business transactions or services unless sold for final consumption.

FB policy supports either replacement flat-tax system if it meets these guidelines:

1. Fair to agricultural producers;
2. Implemented simultaneously with the elimination of payroll taxes, self-employment taxes, the alternative minimum tax, the capital gains tax, death (federal estate) taxes and the current personal and corporate income tax code;
3. Revenue neutral; and
4. Repeals the 16th amendment that allows Congress to lay and collect taxes on incomes, from whatever sources derived.

We also support requiring a two-thirds majority for imposition of new or additional taxes, or for the increase of tax rates.

The Hall/Rabushka model would meet the guidelines set by FB policy for a new system.

The 106th Congress began early debate in support of a new tax system, offering two non-binding resolutions. Senator Richard Lugar introduced a resolution (SRES 24) – expressing the sense of the Senate that the income tax should be eliminated and replaced with a broad-based single-rate national sales tax on goods and services. The House followed with a concurrent tax reform resolution (HCR 148) sponsored by Rep. Bonilla. This resolution was to express the sense of the Congress that the Internal Revenue Code of 1986 must be replaced with a new, low, single-rate system that is simple and fair, allowing the IRS, as we know it, to be abolished. This philosophy also meets FB policy.

Tax Reform Bill Summaries in the 106th Congress:

Six differing bills quickly followed, as indicated below. However, no new actions, outside of healthy debate, have taken place since the introductions of these bills.

1. HR 134 – Simplified USA Tax Act of 1999. Introduced by Rep. English on 1/6/99. Establishes income tax rates for individuals at 15, 25 and 30 percent. This is not a true flat income tax, but it does set lower limits for the 3 marginal tax rates. Defines gross income and exclusions from gross income. Repeals both the estate and gift taxes, but may keep the alternative minimum tax and the payroll tax. Permits contributions to a Roth IRA of up to the amount of an individual’s adjusted gross income. Provides for an exclusion from gross income of Roth IRA distributions.
   
   
2. HR 1040 and S 1040 – Freedom and Fairness Restoration Act of 1999 (1997). Introduced by Rep. Armey (3/9/99) and Senator Shelby (5/13/99). Imposes a (flat income tax) 19 percent tax (17 percent after December 2000) on the taxable income of every individual. Patterned after the Hall/Rabushka model. Redefines taxable income to mean wages, retirement distributions, and unemployment compensation that exceed the standard deduction. Increases the basic standard deduction and includes an additional standard deduction for dependents. Repeals the alternative minimum tax and estate and gift tax, and includes a super-majority (three-fifths) required for tax changes in the future – all consistent with our policy. The Senate Bill is slightly different, imposing a flat 20 percent income tax rate and later lowering it to 17 percent, to keep receipts revenue neutral – another FB policy position.
   
   
3. HR 2001 and HR 1467 (Same Bill) – National Retail Sales Tax Act of 1999. Introduced by Rep. Tauzin (5/27/99 & 4/15/99). Repeals the income, estate, gift and certain excise tax provisions, per FB policy. Impose a 15 percent (national sales) tax on retail sales. Prohibits imposing a (national sales) tax on any property or service purchased for a business purpose in an active trade or business. Allows for a used property credit, an administration credit, a bad debt credit, a transition inventory credit and others. Eligible families receive a sales tax rebate. Eliminates the IRS after FY 2003. Establishes an Excise Tax Bureau and a Sales Tax Bureau to administer the new tax. Authorizes the Social Security Administration to collect and administer self-employment income and employment taxes beginning in 2001. Requires a super-majority in the House or Senate to raise rates.
   
   
4. HR 2525 – Fair Tax Act of 1999. Introduced by Rep. Linder on 7/14/99. Eliminates the income tax, payroll (employment) tax, capital gains tax and estate and gift taxes, per FB policy. Imposes a national retail sales tax on the "use or consumption in the U.S. of taxable property or services". Sets the national sales tax rate at 23 percent for 2001. Sets the rate afterwards at the combined sum of the general revenue rate, the social security rate and the hospital insurance rate. Currently, very close to 23%. Does not appear to tax the purchase of inputs used by a farmer or rancher in the production of agricultural commodities – another FB policy position. Also, appears to be revenue neutral.
   
   
5. S 822 – Flat Tax Act of 1999. Introduced by Senator Specter on 4/15/99. Eliminates the income tax, payroll (employment) tax, the capital gains tax and estate and gift taxes, per FB policy. Imposes a flat income tax of 20 percent of the income of individuals and businesses. Allows a standard deduction with inflation adjustments, a limited charitable contribution deduction and a limited mortgage deduction. Allows business deductions for the cost of business inputs, compensation paid to employees and the cost of personal and real property used in business activities. Repeals the estate, gift and generation-skipping transfer taxes.

Such bills in the 106th Congress amend/strike the current tax code and replace it with:

• A 15 percent (HR 2001) or 23 percent (HR 2525) National Sales Tax based on a single rate.
• A 17 percent (HR 1040 and S 1040) or 20 percent (S 822) Flat Income Tax, similar to the Hall/Rabushka model.
• A simpler graduated income tax (HR 134), with lower marginal tax rates.

The bills would also meet other FB criteria by repealing the estate tax, the alternative minimum tax, the capital gains tax and certain measures of the current income tax code.

This page was last modified Wed Sep 20, 2000 at 01:51 am