The Federal Tax Code Must be Replaced With a Fairer and Simpler System

by Herman Cain, New Voters Alliance (Some of his comments to the tax commission)

I. Introduction
The current income tax system cannot be reformed. It creates disadvantages for multinational businesses, domestic businesses, individuals, and our government.
No amount of tinkering with a portion of the tax code is going to fix it. It is too complicated. It inflates the costs of U.S. goods and services to other nations. It is too unfair and inefficient. It discourages people from working harder to achieve upward economic mobility, which destroys hope and opportunity.
The current tax system needs to be replaced. It can be replaced with a national sales tax, also known as the FairTax (H.R. 25 and S 25).
Several commissions over the last twenty years, including the one I served on in 1995 (The National Commission on Economic Growth and Tax Reform), have all concluded that a replacement tax system should satisfy six principles.
First, it should promote economic growth by reducing marginal tax rates and eliminating the tax bias against savings and investments.
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. Simplicity would dramatically reduce compliance costs and allow people to truly comprehend their actual tax burden.
Fourth, it should be neutral rather than allowing misguided officials to manipulate and micromanage our economy by favoring some at the expense of others.
Fifth, it should be visible so it clearly conveys the true cost of government and so people would not be subjected to hidden changes in the tax law.
Sixth, it should be stable rather than changing every year or two so people can better plan their businesses and their lives.
In remarks made in March, 2005 before the President’s Advisory Panel on Federal Tax Reform Federal Reserve Chairman Alan Greenspan stated, “Many economists believe that a consumption tax would be best from the perspective of promoting economic growth particularly if one were designing a tax system from scratch because a consumption tax is likely to encourage saving and capital formation.”
Consider the compelling advantages of replacing the current income tax code with the FairTax.
• Gross Domestic Product would increase 10.5 percent in the first year and level off in succeeding years at approximately 5 percent annually.
• Consumer prices would decrease an average of 22 percent on goods and an average of 25 percent on services by eliminating the corporate taxes and compliance costs currently imbedded in the costs we pay for goods and services.
• A single national sales tax rate on all new goods and services of approximately 23 percent would be revenue-neutral and would replace the current annual tax revenues of nearly $2 trillion.
• The annual amount of tax avoidance, according to IRS estimates, is nearly $300 billion. This amount would not escape the FairTax.
• The annual cost of compliance with the tax code is estimated at over $250 billion. In addition, businesses and taxpayers spend nearly seven billion hours each year filling out their IRS forms and many more calculating the tax implications of business decisions.
• The annual amount of tax loss due to illegal activity is estimated between $500 billion and $1 trillion. Under the FairTax, those engaged in illegal activities would no longer avoid paying their fair share.
• Imported goods would be treated the same as domestically produced goods. This means U.S. businesses would be much less likely to locate their plants overseas.
• All taxpayers would have an equal voice, not just people who can afford tax lobbyists and skilled tax accountants.
• The FairTax would effectively untax the poor, due to its rebate provision.
• The FairTax does not punish those who work second job to improve their family’s economic situation.
• The FairTax untaxes education, by allowing parents to save and invest for their children’s futures.
These advantages of a national sales tax on consumption have been well researched, analyzed and documented by some of the most respected business people, economists, and academicians in the country. Hundreds of thousands of citizens are now actively supporting a change from an income tax to a national sales tax on consumption. The FairTax will unleash the full potential of the U.S. economy, and the potential inside businesses and individuals to pursue economic freedom.

II. Description of Proposal
The FairTax is a non-partisan proposal that abolishes all federal income taxes, including personal, estate, gift, capital gains, alternative minimum, corporate, Social Security, other payroll, and self-employment taxes, and replaces them all with one simple, visible, federal retail sales tax.
The FairTax dramatically changes the basis for taxation by eliminating the root of the problem: Taxing income. The FairTax taxes us only on what we choose to spend, not on what we earn. It does not raise any more or less revenue; it is designed to be revenue neutral. The FairTax is a fair, efficient, and intelligent solution to the frustration and inequity of our current tax system.
Collection Methods

Retail businesses collect the tax from the consumer, just as state sales tax systems already do in 45 states; the FairTax will simply be an additional line on the current sales tax reporting form. Retailers collect the tax and send it to the state taxing authority. All businesses serving as collection agents will receive a fee for collection, and the states will also receive a collection fee. The tax revenues from the states will then be sent to the U.S. Treasury.

The FairTax is not new – most Americans come into contact with sales taxes daily, since 45 states currently use them to collect state revenues. It is easier to switch from an income tax to the FairTax system than it is to switch from gallons to liters or from feet to meters! Of course, those who depend on the structure and complexity of our current system (e.g., tax lobbyists, tax preparers, and tax shelter promoters) will have to find more productive economic pursuits. However, everyone will have enough advance notice to adjust to the new system.

Under the FairTax, everyone will have to think about taxes in a different way. Income – what we earn – will no longer have to be documented, measured and kept track of for tax purposes. The only relevant measure of our tax liability will be the amount we choose to spend on final, discretionary consumption. Tax-related issues will suddenly become a lot simpler and more straightforward than they used to be. The aggravation and anxiety associated with “April 15th” will disappear forever after passage of the FairTax.

Under the Fair Tax, job creation will boom. Residential real estate will boom. Financial services will boom. Exports will boom. Retail will prosper. Farming and ranching will prosper. Churches and charities will prosper. Civil liberties will be enhanced. In short, it is difficult to imagine all the far-reaching, positive effects of this change from taxation on income to taxation on consumption
The future stability of our nation’s economic infrastructure, and the future for our children and grandchildren, will be determined by the political will and courage in Congress to be aggressive with solving the big issues such as the tax code mess. The 92-year-old income tax code thwarts the natural, individual motivation of citizens to use their God-given talents to pursue happiness and their respective dreams.
Conversely, the FairTax allows all Americans to own all the returns on their sweat equity as the fruits of their labor. Ownership lets people realize their dreams and opportunities and is the key to the greatest nation on earth remaining the greatest nation. We have a moral obligation to protect our Founding Fathers' vision and to protect the unalienable right of ownership for our grandchildren.
It's our unalienable responsibility.