New tax rate would create more jobs, spending

As I reported last month I attended the week-long Western Republican Leadership Conference held aboard an ocean liner plying its way through Alaska's Inside Passage. Many national GOP luminaries attended and gave presentations including Tom Wright, executive director of Americans for Fair Taxation.

Proposals have been made in the past to eliminate the Internal Revenue Code and replace it with a national sales tax but for such a proposal to be revenue neutral the tax rate would have to be pretty hefty. However Washington think tanks and academics have massaged and honed the concept and the proposal is now before Congress as H.R. 25 and S. 25. At present 128 house members, including Nevada's Jim Gibbons and John Porter, have taken positions favoring the concept as have 21 senators, including Nevada's John Ensign and Harry Reid. Additionally 81 economists from major US universities have signed an open letter to President Bush and Congress endorsing the proposal. What would this legislation do if passed and signed into law?

It would eliminate all federal income taxes for individuals and corporations, eliminate payroll withholding taxes for Social Security and Medicare and eliminate estate and capital gains taxes. Under the plan federal spending would remain unchanged and a federal consumption tax of 23 percent would be assessed on every single good or service purchased at the retail level (except education which is classified as an "investment", not consumption). All entities, including state and federal government, would pay this tax at point of sale. Individual federal income tax returns would be eliminated as would IRS audits and . . . for that matter . . . the IRS.

Sounds great but isn't a consumption tax of 23 percent a little stiff? Not really. Economic studies have shown that prices of all goods and services currently include a bump of approximately 22 percent reflecting the imbedded corporate and individual income taxes paid by the producers of those goods and services, so competition would cause prices to drop by about 22 percent after all income taxes are eliminated.

Additionally all workers would take home 100 percent of their paychecks instead of about 67 percent as at present (plus arguably the almost 8 percent employer's share of payroll taxes). Finally every household would receive a monthly rebate equal to the amount of consumption tax families at the poverty level pay on basic necessities.

For example the rebate would be $9,750 per year for a single person and $38,700 per year for a family of 8 regardless of family income. This "reverse tax" adds some progressivity back to the system which should keep liberals happy, and the additional buying power coupled with little or no net change in price levels should keep everyone happy.

A 23 percent consumption tax rate is calculated to result in no increase or decrease in total federal taxes collected but the end result could be significantly higher revenues.

U.S. corporations who have relocated all or part of their operations off shore to lawfully avoid U.S. income taxes would no longer enjoy any advantage and could relocate in the U.S. bringing back jobs and spending. We could also expect foreign investment and corporate relocations into the U.S. which would create still more new jobs and spending.

Finally those engaged in illegal activities (drugs, prostitution, etc.) which now escape taxes would have to pay into the federal coffers every time they buy a limo, hire a lawyer or get a haircut.

Fierce opposition is expected from Washington DC lobbyists and attorneys. Go get your violin.



Jim Clark is president of the Incline Village/Crystal Bay Republican Advocates. He also serves as chair of Independent Incline.