Tax Reform Debate Sparked On Campaign Trail

Author: Heidi Glenn, Dustin Stamper

Published: August 16, 2004

President Bush and House Ways and Means Committee Chair William M. Thomas, R-Calif., last week joined a growing list of policymakers talking fundamental tax reform, as each praised a consumption tax replacement for the current income tax.

Speaking at an August 10 campaign stop in Florida, Bush called a national retail sales tax an ??interesting?? option. ??I?m not exactly sure how big the national sales tax is going to have to be, but it?s the kind of interesting idea that we ought to explore seriously,?? Bush said. ??The more simple it is, the better it is for the American people. That?s certainly one idea,?? he added.

Although Bush?s comments fall short of an endorsement, they indicate that the president?s consistent calls for tax simplification could be stepped up during the presidential campaign.

Tax reform talk has gradually gained momentum since the spring when House Majority Leader Tom DeLay, R-Texas, predicted that a decisive Republican victory in November would usher in a fundamental tax overhaul, and he endorsed a national retail sales tax proposal introduced as H.R. 25 by Rep. John Linder, R-Ga., and S. 1493 by Sen. Saxby Chambliss, R-Ga.

In his book, Speaker: Lessons From Forty Years in Coaching and Politics, House Speaker J. Dennis Hastert, R-Ill., called the tax code ??archaic and overencumbered?? before laying out plans for a total replacement in 2005 that could include the elimination of the IRS. The book was published earlier this month.

Linder?s Fair Tax proposal would replace all federal personal income taxes, corporate income taxes, payroll taxes, self-employment taxes, capital gains taxes, and gift and estate taxes with a 23 percent sales tax on all retail sales of new goods and services. It would provide a rebate of the sales tax on all spending up to the poverty level.

??There is no fairer measurement of a person?s ability to pay than his or her ability to consume over the course of their lifetime,?? said a statement on Linder?s congressional Web site. ??Wealthy people spend more money on themselves than do other individuals. They buy expensive cars, big houses and yachts. They buy filet mignon, fine wine, designer dresses and expensive jewelry. The Fair Tax will tax them on these purchases.??

Most recently, Thomas said his panel would weigh tax reform options. According to a Bloomberg Newswire report, Thomas told reporters August 11 that it might ??make sense?? to blend the current income tax with a new federal levy on consumption.

??We?re going to be moving forward in the Ways and Means Committee, examining a number of very well-thought-out alternate tax structures,?? Thomas told reporters in a conference call arranged by Bush?s reelection campaign.

It?s unclear whether last week?s statements on tax reform represent an election-year trial balloon in anticipation of the Republican National Convention later this month, or if the policymakers? responses to audience questions captured headlines in an otherwise slow news week. When asked about Bush?s remarks the following day, White House spokesman Scott McClellan would not comment on whether the consumption tax plan or tax reform would be a key part of Bush?s campaign agenda, saying only that Bush?s goal has been to make the tax code ??simpler and fairer?? and to ??keep taxes low.??

Bush?s critics, including his election opponent, Sen. John F. Kerry, D-Mass., were quick to condemn the national retail sales tax. Kerry criticized the president for a ??terrible policy announcement?? that he said White House aides were distancing Bush from a day later. Then Kerry shifted the spotlight to his plan to cut taxes by $420 billion by offering middle-income tax cuts while rolling back previously enacted tax relief for wealthy Americans.

?There is no fairer measurement of a person?s ability to pay than his or her ability to consume over the course of their lifetime,? said a statement on Linder?s congressional Web site.

Some argue that tax reform?s success hinges on the White House?s involvement. At least one House leadership aide sees Bush?s comments as a move in that direction.

??There?s little doubt the platform will include something on the reform issue,?? the aide told Tax Analysts. ??I would expect [the platform] will still leave open the issue of flat versus sales tax.?? The aide added that ??the more specific you get, the more political capital will be available after the election.??

SpecificsAnational retail sales tax was last debated during the 2000 presidential elections when Alan Keyes, former ambassador to the United Nations, highlighted it in campaign debates. Keyes, who recently announced he would run for the open Illinois Senate seat against Democrat Barak Obama, said the ??humiliating?? and ??oppressive?? income tax system threatens Americans? liberty, and compared it to serfdom and slavery. The income tax, he said, invades privacy and represents a national surrender to the government.

Keyes said a national retail sales tax of 20 percent to 23 percent would allow Americans to be in control of earnings and argued that the nation was founded on the notion that the federal government should be funded with tariffs, duties, and excise taxes.

??You don?t have to beg politicians and bureaucrats to get back in control of your own hard-earned dollars,?? Keyes said in a 1999 debate.

However, Bill Gale of the Brookings Institution argues that to replace the income tax on a revenueneutral basis over the next 10 years would require a sales tax rate of more than 26 percent and that to replace all federal taxes would require a sales tax rate of about 60 percent.

Those rates are considered ??tax-exclusive,?? the basis most familiar for expressing state sales taxes. For example, a $25 sales tax on a $100 purchase yields a 25 percent tax-exclusive rate. The same $25 tax can also be expressed as a tax-inclusive rate of 20 percent?the tax divided by the total cost to the consumer of $125.

Bill Gale of the Brookings Institution argues that to replace the income tax on a revenue-neutral basis over the next 10 years would require a sales tax rate of more than 26 percent.

Both are correct, although each is used differently in common parlance. Sales taxes are commonly computed as tax-exclusive rates and income taxes as tax-inclusive rates. By citing the tax-inclusive rate, Gale said in a phone interview, national retail sales tax proponents can champion the lower of the two.

According to Linder, the tax-inclusive rate was chosen ??to be truthful when we compare the Fair Tax with the rate of the taxes it will replace.?? To replace the income tax would require a 21 percent tax-inclusive rate, and to replace all federal taxes would require about a 38 percent tax-inclusive rate, Gale wrote in an August 12 update to a 1999 analysis of a national retail sales tax.

Gale also said the proposal for a 23 percent sales tax would require drastic cuts to government spending because it is based on the assumption that spending would go down over time but prices would remain constant and because it does not take into account evasion and avoidance.

Because business-to-business transactions would not be taxed, individuals could try to buy products through business entities as one potential evasion technique.

And, Gale asks, who would monitor businesses to ensure the appropriate transactions are taxed? Who would cut the rebate checks and ensure that households were receiving the correct rebate?

??You could abolish the IRS, but you?d have to replace it with something else,?? Gale said. ??In the current system there are a lot of complicated pressure points. The sales tax eliminates them but creates a whole new set.??

Full Text Citations

? Prior news coverage. Doc 2004-15982; 2004 TNT 151-3

? H.R. 25. Doc 2003-2941; 2003 TNT 23-44

? Fact sheet on H.R. 25. Doc 2003-11303; 2003 TNT 88-26

? August 12, 2004, update on Gale paper. Doc 2004-16441