FairTax would encourage investment

Slow-Growth U.S. Now Ripe for Consumption Tax: Kevin Hassett – Bloomberg

…Those who today decry the irrationality of the tax code and advocate fundamental reform are ignored by elected officials. Rather than a simple-to-understand code, politicians prefer the current mess, a tangle of exceptions that makes it easy to pass out favors without being noticed.

Just figuring out what you owe is so complicated that few Americans dare do their own taxes. Talk about busywork: In her annual report, the Internal Revenue Service’s national taxpayer advocate, Nina Olson, estimated that American taxpayers and their hired preparers spend 6.1 billion hours annually complying with the law. That’s equivalent to the hours of 3 million full- time workers.

What might we accomplish by dedicating the work of these hypothetical 3 million people to something more productive? Persistently slow growth has become the kind of problem that calls out for a big idea, one that can produce steady improvement, not just a short-term jolt. Moving toward a consumption tax would encourage investment in capital, potentially increasing future growth…

Hearing on Fundamental Tax Reform

Chairman Camp Opening Statement: Hearing on Fundamental Tax Reform
Thursday, January 20, 2011

Washington, DC – Ways and Means Chairman Dave Camp (R-MI) today delivered opening remarks at the Committee on Ways and Means Hearing on Fundamental Tax Reform. Below are excerpts, followed by the full remarks.

The Tax Code
“Clearly, the tax code is too complex, too costly, and takes too much time to comply with. All this adds more burdens on families and employers – making it more difficult to create jobs in this country.

“I am under no illusion that the task before us will be easy. To really reform the tax code in a way that lowers the tax rate, broadens the base, and promotes the competitiveness of American companies, we will need to make some tough choices.”

Tax Reform Requires both Bipartisan Effort and a Conversation with American People
“I don’t think this can be, nor should it be, a partisan exercise. And it cannot happen just because one Chamber passes a bill. It will require the active participation of all Members of this Committee. It will require us to work with the Administration. And yes, we will even have to talk to the Senate.

“More importantly, we will talk to the American people – individuals, families, employers (large and small) – who are actually impacted by the laws we pass here in Washington.”

Read the rest of Camp’s statement at: http://waysandmeans.house.gov/News/DocumentSingle.aspx?DocumentID=220636

Tax Politics

The tax code has changed 4,428 times in the last decade!

What is fundamental tax reform?

What is fundamental tax reform? It certainly is not merely tinkering with the rates and pruning the dead wood from old deductions. That exercise can more accurately be likened to rearranging the deck chairs on the Titanic.

Rather, fundamental tax reform is about changing the structure of the tax system so that the following adverse economic trends are addressed:
1. the crisis in SS & Medicare,
2. the trade deficit and the ongoing erosion of our manufacturing base,
3. the federal budget deficit, to the extent that slower economic growth is a major contributing factor,
4. our low personal savings rate, a source of concern for almost all serious economists,
5. the AMT
6. the ongoing spiral of increased complexity and higher and higher compliance costs

In addition to being exacerbated by the current tax system, all of these have one other thing in common – they are all unsustainable.

Global Competitiveness

We are currently the only OECD country with no border adjustment element in our tax system. Soon we will also have the highest corporate tax rate.

Because the current system is not border adjustable, American producers face at least an 18% cost disadvantage relative to their foreign competitors, and then you add compliance costs on top of that. 18% is a very large figure when just a few percentage points can make the difference in the market place.

So there is no question that we have a huge educational challenge before us. We have to educate Americans relative to the trade benefits of the FairTax and we have to educate FairTaxers in regards to globalization.

Globalization is one of the largest megatrends in world history. There are hundreds of millions of Chinese moving from rural areas where they have been trying to eek out an existence for generations by farming plots the size of a condo back-yard (slight exaggeration). They are eager to move into cities living in huge dorms working for wages and under conditions that no one in the U. S. would tolerate. A similar transformation is taking place in India and in other third world countries. This is a big part of what Three Billion New Capitalists – the great shift of wealth and power to the east by Clyde Prestowitz is all about. Another terrific book on globalization is The World is Flat – a brief history of the 21st century by Thomas Friedman. I also recommend China, Inc. by Ted Fishman.

One of the major points made by all these authors is that Americans, as a rule, have no idea what is going on in China and other countries and they are therefore not demanding that their government address global competitiveness in a real and meaningful way.

Of course, the FairTax offers tremendous trade benefits and why must be a part of any serious attempt for the U. S. to adapt to the challenges of 21st century globalization.

Interesting tidbit

According to Tax Policy Center, two-thirds of taxpayers pay more in payroll taxes than income taxes.

Neal Boortz Explains The Fair Tax

The FairTax would already increase the revenue stream over and above what it would have been under a continuation of the current system. The reason is that it would stimulate the economy or, more precisely, that it would increase the rate of GDP growth. Almost all the economic studies show GDP increases during the early years of 10% (or slightly more) higher than it would have been under a continuation of the current system. That means that if GDP growth would have been 4% under the old system (which is currently considered rapid economic growth), then it would be 14% or more during the first year after implementing the FairTax.

Think about that number for a minute – 14% GDP growth. We have some senior Americans on this list, but none of us has ever lived through a year in which the US economy grew by double digits. This is Chinese type of growth in an economy that is 3 times the size of China’s. Of course, that rate of growth would gradually decline over the years as our economy adjusts to the FairTax (and other nations would almost undoubtedly copy), but the growth rate under the FairTax would never be less than it would have been under a continuation of the old system and therefore the gap between the size of the economy under the FairTax and where it would have been under a continuation would be permanent. Some economists have estimated that by the time the growth rate differential levelled off to less than a percentage point (in about 10 years), the US economy would be 1/3 to 1/4 larger than it other wise would have been and this difference would be permanent.

Some of you may be asking yourselves how can we say that the FairTax will raise more revenue than the current system while at the same time also saying that it is revenue neutral? Please remember that the revenue neutral calculation is based on a static analysis, while the revenue gains must be looked at from a dynamic perspective. A static analysis looks at a snapshot in time, while a dynamic analysis considers a broader time perspective and factors in the changes to the economy that are likely as a result of the policy proposal itself.

There has been a fierce debate raging in congress for some time relative to the proper way to score tax bills – static vs dynamic. That debate has gone on completely independent of the FairTax. However, it is a critically important concept to understand relative to the FairTax simply because no other policy change would have such a profound effect on our economy.

With respect to the deficit, it is instructive to look back to the 90s when we had budget surpluses and forecasts of surpluses “as far as the eye can see”. What happened during this past decade to change those surpluses into deficits and more forecasted deficits?
1. Spending has gone up enormously, much faster than the rate of inflation or economic growth, and
2. While the economy was growing at a rate of 4% (or slightly above) during the latter part of the 90s, that growth rate has slowed to less than half that (on average) during the last decade.

Conservatives have a tendency to focus solely on #1, but it is clear that spending cuts alone will not be enough to address the current magnitude of the deficits we face. Clearly, we have to do something to increase the rate of economic growth without spending more money at the federal level. This is where the FairTax comes in.

The FairTax would increase the rate of economic growth primarily for the following three reasons:
1. It would cause prices shifts in US produced goods that would increase demand in both foreign and our own domestic market,
2. It would facilitate the repatriation of much of the estimated $13 trillion stranded offshore by the current tax system, and
3. It would eliminate several hundred billion dollars annually in wasted compliance costs.

Last, as to concerns about raising the rate as a means of raising revenues under the FairTax, I would suggest that is always a risk if we citizens are not vigilent. However, I believe it is less a risk under the FairTax than under the current system, which facilitates the political games that politicians like to play in which they increase taxes on some groups in order to bestow favors on favored groups. One of the founders said it better than I can:

“It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, ‘in political arithmetic, two and two do not always make four.’ If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.”

Alexander Hamilton in Federalist #21

World’s largest tax haven

“If the U. S. truly repealed its corporate income tax and replaced it with what is essentially a border adjustable consumption tax, the U. S. would be one heck of an attractive place to invest. In fact, the U. S. would be the world’s largest tax haven. We would be better than Ireland. Any foreign company could come here and manufacture and there would be no income tax. Remember that I said that 120 countries in the world had VATs? None of them repealed their corporate income tax. This would get rid of the corporate income tax and put in place this consumption tax, so you can imagine that this would make the U. S. a very, very attractive place to invest and it would undoubtedly lead to international repercussions that would be quite interesting. I think other countries would probably copy.”

Dr. Peter R. Merrill
Director, National Economic Consulting Group
PricewaterhouseCoopers
Former Chief Economist, Joint Committee on Taxation

Tariffs

It makes no sense to band-aid our current tax system with discriminatory tariffs in order to offset a structural problem which favors foreign producers over our own domestic producers. Why not address the structural problem itself and tax foreign produced goods the exact same way we tax our own domestically produced goods? Doesn’t a non-discriminatory approach like the FairTax make more sense than introducing discriminatory measures into our tax system which would invite retaliation by our trading partners and a response from the WTO?