Mr. Speaker, in the last 5 or 6 weeks, a bill that I introduced, H.R. 25, the FAIR Tax, has been getting a great deal of interest in the national press, part of it because the Speaker mentioned it in the book he recently published, and…
Mr. Speaker, in the last 5 or 6 weeks, a bill that I introduced, H.R. 25, the FAIR Tax, has been getting a great deal of interest in the national press, part of it because the Speaker mentioned it in the book he recently published, and part because the President took a look at it just prior to the Republican convention.
A lot of it is because the last 2 days the Democrats have taken a keen interest in it and have found unusual forums in which to trash it, including a 27-page critique that the House Minority leader put out today. I will say some of those criticisms are interesting, and some are even true.
But, in any case, what they failed to do in the 27 pages was to discuss the problems we are facing precisely because of our current system. They can spend all the rest of the next year or two defending the current IRS system, saying it is a good system, and ignoring the problems, but we cannot ignore them much longer.
Americans spend between 6 and 7 billion man-hours each year just filling out IRS forms. We spend that much time calculating the tax implications of a business decision. We lose 18 percent of our economy to making tax decisions instead of economic decisions.
The current director of the Congressional Budget Office informally in a conversation told me he believes we spend upwards of $400 to $500 billion a year to comply with the Code and remit $2 trillion. This is hardly an efficient way to raise taxes.
Studies show that it costs the average small business $724 to collect, comply with the Code and remit $100 to the Federal Government. And who pays all those compliance costs? Who pays all those payroll taxes that get embedded into the costs of goods at retail? Who pays the income taxes?
It is not the business. There simply is not a mechanism for a business to pay a bill other than through price, and our customers pay them all. In fact, the only taxpayer in the world is a consumer, who finally consumes the product and all the embedded costs, we have it.
The study we had commissioned out of at Harvard 5 or 6 years ago argues that 22 percent of what we spend at retail represents the imbedded cost to the IRS. Anybody who is working and spending 100 percent of the income to live is losing 22 percent of their purchasing power to the current system.
But it also causes us to ship goods and services into a global economy with a 22 percent tax component in the price system, making us less and less competitive in a world economy and causing jobs to move overseas, where the embedded tax component in the price system is considerably less, particularly in those nations that have a value- added tax that is rebated at the borders.
We also drive offshore, because of our Tax Code, capital. There is today 5 to $6 trillion in overseas accounts because it is cheaper to borrow at 6 percent interest than to repatriate dollars at 35 percent tax. So they are protected overseas, and in some cases, able to be spent over there. Not to mention wealthy individuals who keep money offshore to protect it from a confiscatory tax system.
We drive underground elicit activity because of our Tax Code. It is estimated that pornography, illicit drugs and illegal labor constitute a $1 trillion economy that is untaxed. Under a consumption economy, if they wanted to buy something, they would at least pay their fair share to the government.
The Alternative Minimum Tax was passed in 1969 to ensure that wealthy people who have no tax liability due to their legal use of deductions and credits would still have to pay some taxes. In 6 years, 35 million Americans will be subject to the Alternative Minimum Tax.
We spend over $30 billion a year on Earned Income Tax Credit designed to rebate to low-income workers the cost of the payroll tax burden, the tax that pays for Social Security and Medicare. It is estimated that 25 to 30 percent of that is fraud.
Then the big issue, the big issue is Social Security and Medicare. The current dollar 75-year unfunded liability in Social Security and Medicare is $51 trillion. Trillion. To put that in perspective, if you started a business on the day Jesus Christ was born and lost $1 million a day through yesterday, it would take you another 720 years to lose $1 trillion. We are looking at 75 years of costing us $51 trillion.
How do we solve this? We abolish the income tax and repeal all taxes on income and get rid of the IRS; get rid of personal and corporate income taxes, self-employment taxes, capital gains taxes, the gift tax, the death tax. All would be replaced by a single tax on personal consumption.
Yes, we would get rid of the payroll tax. It was said on the floor yesterday that our bill did not deal with the payroll tax. I would be willing to have these debates, but I want to have them with people who have read the bill, because the bill is the only one that has ever been introduced that totally abolishes the payroll tax, and the payroll tax is the highest tax that 75 percent of America pays.
If you would get rid of the IRS and get rid of all tax on income and let competition drive the tax component out of the tax system and replace it with a one-time, single consumption tax, out of every dollar you spend on personal use, 23 cents goes to the government, the rest stays with the merchant, we would fund the government at the current level, but everybody would keep, get to keep their whole check and become a voluntary taxpayer.
Now, that number has been criticized as being rather high. I will repeat you are currently paying 22 cents, but just do not know it. But today, if you earn $1, 36 cents goes to the government and 64 cents is left to spend. Would you not rather pay 23 cents out of every dollar you spend, rather than 36 cents out of every dollar you earn?
But, more importantly, the FAIR Tax is fair because it contains a rebate for every household in America which would totally rebate the tax consequences of spending up to the poverty line.
Currently people who spend all of their income lose 22 percent of the purchasing power to the embedded cost. Under our system, that rebate would totally untax them up to the poverty line. Poverty level spending, by definition, is that necessary for a given size household to buy their essentials. For my mother, it is $9,500 year. For a family of four, it is about $25,000. For a family of six, it is $30,000. Their spending in a year up to that amount would be totally untaxed, plus they would not pay the embedded costs. It would be gone.
The FAIR Tax is a volunteer system. Every citizen becomes a voluntary taxpayer, paying as much as they choose, when they choose, on how they choose to spend. And I mentioned before that it would drive that 22 cents out of the system.
The FAIR Tax is border neutral. Under the FAIR Tax, imports to our shores when bought at retail for personal use would be taxed at exactly the same level as our domestic competition, something that has never happened before.
Lastly, it would solve our Social Security and Medicare problem. In the Democrat's report, 27 pages today, they have a study that said Medicare would run out of money in 8 or 9 years instead of 10 or 15 years under my system. I do not know how they could come up with that, because today Medicare is funded by the workers, 138.5 million people working to pay for Medicare for all the retirees.
We are going to increase the number of retirees in the next 30 years by 100 percent. We are going to increase the number of workers by 15 percent. I do not know how you can sustain that system.
Our system, the tax on consumption, would increase the number of payers from 138.5 million workers to about 300 million citizens every time something
was purchased and 40 million visitors to our shores. We would nearly triple the number of people paying in, and, indeed, we would double the revenues to Social Security and Medicare in just 15 years by doubling the size of the economy. That is an estimate of many economists who have looked at this. And the FAIR Tax would raise somewhere around $200 billion a year from the underground economy.
Beyond these arguments, what will this new paradigm do for our economy? First of all, we have $400 or $500 billion dollars saved every year from compliance costs. That would be less moneys we would have to pay at consumption.
The money saved on compliance costs would be put to an efficient and profitable use and create jobs. Our gross domestic product would increase by $180 billion per year because we no longer would have to make tax decisions.
Eliminating the income tax would bring down long-term tax rates by 30 percent, and with no tax on capital or labor, and this is key, with no tax on capital or labor, nobody could compete with us in a world economy. We would be selling goods and services in a global economy with a zero tax component in our price system, and to compete with us, every foreign-owned corporation would have to build its next plant in America.
An informal study quoted several times by the former chairman of the Ways and Means, Bill Archer, said that a study done of about 400 or 500 European and Japanese firms, they were asked what would you do in terms of your long-term planning if the United States abolished all taxes on capital and labor and taxed only personal consumption? Eighty percent said they would build their next plant in the United States. In fact, we do know that Daimler-Chrysler wanted to be Chrysler-Daimler and wanted to be in New York City.
They are in Stuttgart, because of the tax system. Deficits spooked the markets; our markets are down because of deficits. Instead of a 20 percent decline in revenues over the last 3 years or last 4 years, had we been on our system, we would have increased revenues in 14 of the last 15 quarters. Add this to a huge increase in capital investment, making workers more productive and giving them larger take-home pay.
We are going to hear a lot on this bill over the next several years, and I believe it will pass because of the economic forces that are coming to bear. I urge my colleagues to read the bill. It is 132 pages, replacing 55,000 pages of statute and regulation. It is not all that complicated. Sooner or later, those who are criticizing might even pick it up and take a look at it. I will enjoy the debate.
Mr. Speaker, I yield to the gentleman from Minnesota (Mr. Gutknecht).
Mr. Speaker, I want a system where nobody in the government knows how much you make or how you make it or how you spend it. I want a system that funds us at the current level, consistently, but does not keep track of us and will give you the privilege of anonymity in a free society.
That is correct.
That is correct.
Whatever you choose to do, it is your money. You made it, and you spend it, and you can spend it anonymously without having to go to the government.
Mr. Speaker, there have been a variety of numbers, I know it is huge. I got all of the regulations at one time in my office and stacked them on the floor up to here, and it was huge. However, it is so complicated that no one understands it. It is correct that, under the law, you have to abide by it, but it is also correct that nobody knows what it is.
Money Magazine sent 49 different professional tax preparers the same economic data from a family and asked them to do the tax return and got back 49 different tax returns, none of which was correct. If you call the IRS help line today and ask for help in filling out your own tax return, over half the answers you get will be incorrect.
Now, the gentleman mentioned our Founding Fathers rolling over. Just imagine a system where, in 1912 or 1911, they are discussing the income tax, and somebody says, I have an idea, let us punish people for working and saving. Let us tax everybody. Let us make sure that nobody escapes. Let us make sure it is about 36 percent of what they earn. They would never have made it this far. They would never have gotten this far and they would have been laughed out of town.
Since 1986.
Companies are leaving our shores not because they hate America, not because they are mean-spirited; they are leaving our shores because they are being driven off. They are being driven off by the tax system that embeds so much into the price that they cannot compete in the world market.
So some years ago we had a big debate here about people leaving, wanting to leave their citizenship here and move to another nation that had lower tax on the death tax, and half this House thought, well, it is shameful if they do that, let us get their money before they leave, and the people said, fix the Tax Code and they will be here. If we eliminate tax on capital and labor, we will be the world's most attractive tax haven, and the $6 trillion would quickly rush to our shores to be invested in our stocks, our bonds, lower interest rates, create jobs that cost about $100,000 to create one job in this country.
But in addition to the $6 trillion in the dollar market that would come, how many tens of trillions would come from foreign countries in our markets because we have the best markets in the world. We have the most productive workers in the world. They would rather build in Michigan to service the car industry in Michigan than to build offshore and have to ship it in. If you get the tax component out of that system, they would be there in a second, and they have said that.
Well, I do not know where the numbers come from. The IRS admits it is $5 trillion. The people who are in the offshore financial centers say it is $6 trillion. But we just did some minor research. We know that the high-tech industry itself in California has about $150 billion offshore. It is too expensive to repatriate. We know that Pfizer has $59 billion offshore. They sell in the French market for francs and in the Japanese market for yen and the German market for marks, and then they convert that into euro dollars and they hold it offshore. All of that money would be back in our markets creating jobs and bidding companies. We do not know how much Japanese money is floating around that would come here, but just imagine what would happen to our stock markets if all the world's investors could invest in our stocks with no tax consequences. We have had two money managers, whose names would be familiar to you, who would say, I do not know what the market would be at as days pass, but in 2 years, it will have doubled.
There is no question that we will be the attraction, we will be the attractors of capital, and when you bring capital in, you create jobs. And this country needs job creation.
That is right. So the consumer of that small business not only pays the $100 plus the payroll tax, it also pays the $724.
That is correct. This is hardly an efficient way to raise taxes.
That is correct.
Mr. Speaker, we precisely made the decision in the drafting of this bill not to fight the battle over increasing or decreasing revenues; we would lose votes on that issue alone, not to eliminate all the excise taxes, we would lose 150 votes in this House just on tobacco; not to reform any programs; we wanted to just change one paradigm, collecting revenues on income, to another, collecting revenues on consumption, so that it would be neutral. Let us just admit that the United States consumers would save tons of money if they just were voluntary taxpayers and paid taxes when they chose to pay taxes, and then, later, we will worry about the size of the government.
But I want to tell my colleague one thing about the size of government if we pass this. Nobody knows how much we spend here. But if my mother saw every time she bought a loaf of bread how much went to Federal taxes, she would start showing the interest. We right now have a huge bias in favor of more government and more taxes because most of us do not pay the income taxes, but we pay the consumption tax currently embedded in the goods and services that we buy, and that is what we have to convince America of. You are already paying this tax. It is the same tax.
But how would you like to pay the same taxes and have the same standard of living, but if you are making $60,000 a year, instead of taking home $3,800 for your house payment and your groceries, you are taking home $5,000? You get everything you earned, nothing taken out. Your net pay and your gross pay are the same.
I want to make it clear that the consumption tax about which we are speaking is not to be treated the same as the State sales tax which is an exclusive tax on top of what you spend. This is included in what you spend.
The reason we did it that way, an inclusive tax, is because the tax we are seeking to replace is inclusive of what you earn. If you were going to treat this as a State sales tax on top of what you spent it would be 30 percent. But to compare that with the income tax on top of what you have left to spend, the current income tax is effectively a 56 percent tax rate. Either one, the sales tax is better.
If you go to the store and buy that $500 refrigerator, that may include the tax within it, but the price of the refrigerator will have fallen because the embedded cost would no longer be there.
It is easier for me to do this on something I looked a lot at because the real estate people talk a lot about this. The real estate people say, how can I sell homes if I do not get to deduct the mortgage interest deduction on a home. I say, if you really think that sells your home, double your interest rate and you will sell twice as many homes.
The current embedded cost in the home of the current system is 28 percent. Under our system, it would be 23 percent. The home will be less expensive, the same house. If a person is making $60,000 a year, he is currently bringing home $3,800 a month to make that house payment. He will bring home $5,000 a month under this system. But more importantly because of all the tax complications that come out of the interest rate system, interest rates will decline by 30 percent. So the house is less. The take-home pay is more. The payment is less. We think we will sell lots more houses.
Another nice spring day.
They would not have to keep a receipt.
That is correct.
I can tell the gentleman how much that would be.
The average income earner pays a 28 percent withholding tax and 7.65 percent, their share of the payroll tax. Their increase in take-home pay would be about 55 percent the next day.
That is correct.
Let us remind them that no business inputs are taxed. No tractor will be taxed. No barn will be taxed. Anything used in the business is tax free. No seeds will be taxed.
I tell the farmers if you buy a tractor to work your land, there is no tax on it. If you buy a hat to wear on your head, there is. Personal consumption. No business inputs are taxed whatsoever, so farmers are universally in favor of this because it also gets rid of the death tax for them which is a huge issue.
We said on the floor yesterday that agriculture would go to bills. The important thing is for us to continue to repeat to farmers and other people who buy equipment that, number one, there is no tax on it, but, number two, the cost of the equipment will go down 20 to 25 percent. So you will buy the same tractor for far less money, and there will be no tax on it whatsoever.
Now, one farmer did raise an interesting question for me. If the value of my equipment declines, how can I borrow as much on it? I said, well, things change all the time in the farm business, but you can buy the new one a whole lot less expensive.
That is correct.
Who, by the way, did a lot of the studies for our bill
The illegal labor.
I do.
It is over a trillion dollars right there in the underground economy. Just three portions of it in a recent book published by an economy, pornography, illicit drugs and illegal labor constitute a trillion dollar economy.
When I speak to groups, I always ask if there is a banker in the room. If a banker raises his or her hand, I say everybody follow her to her bank on Friday afternoon at 4 o'clock in the afternoon you will see it. And they always just smile and grin because the contractor is coming out paying off subs in cash. It happens outside of every bank in America that does retail banking. It is huge.
We do not want to find new places to tax. We think everybody ought to be paying fairly.
Government's principal role ought to be neutral, not pick winners and losers. That is why we tax services, as well as goods. We tax Internet sales, as well as catalog sales, as well as local sales. We do not believe that the guy down the street who builds a building, hires their kids, goes to a church, votes at our elections should be put at a 7 percent disadvantage same as a dot-com. So we say this bill is drafted with the first principle, that government's role is neutral, not picking winners and losers.
My daughter at 35, she is now 37, called me and she said what in the world is AMT. She has got four little boys and the deductions and a fairly decent income gets them into the AMT. When it was set in 1969, it
captured 90,000 taxpayers. In 6 years, it will capture 35 million.
Mr. Speaker, the folks on the other side of the aisle will worry about people getting too rich and who is going to benefit from this and how you are going to hurt the poor. Let us just deal with that for a second.
We are going to totally untax the poor. Today, people who are living at or below the poverty level are losing 22 percent of the purchasing power for the current system, and we are going to tax accumulated wealth. For that couple that paid taxes all the money they earned over the years, paid capital gains and then sold the business, paying taxes on the interest they are earning today, we are going to tax them one more time and they spend it. To those people I say, you are already paying this, but what do you think about the freedom that the gentleman from Iowa just talked about, to do what you want with that money and not have to deal with that?
We are going to make people pay taxes when they choose to pay it by how they choose to live, and everybody's free to do that.
The gentleman had another point on trade that I would like him to expand what the rest of the world would do, because we talked about this a couple of years ago.
I respond to it that people do not put money under the mattress anymore. Wealthy people spend more than poor people. They will pay a higher share of the total cost of government; but to the extent that they do not spend that money, they are going to put into banks or into businesses and create jobs.
If they accumulate a great deal of wealth, I can tell you what they are going to do with that, too. They are going to do what every great wealthy family has done in the history of this country. They are going to give it away. Another question raises charitable contributions. People do not give money away because they can deduct it. They give money away when they have more to give away. The more they have to give away, they more they give away. The great fortunes that have been given away in the history of this country were given away before the Tax Code was ever in place. So they accumulate fortunes. They will invest it. They will create jobs, grow companies, and then give it away.
I would say they can create jobs with it because people borrow it.
Which creates more revenues to the Federal Government.
It has always been the case.
And grow the economy with that investment.
It is really simple.
Wealthy people pay taxes on personal consumption, and wealth has no meaning unless it is spent on personal consumption.
If I had $100 million and lived in a $20,000 home and drove a used car, that $100 million would mean nothing to me. So somebody would be borrowing it, building their business with it, and creating jobs with it. Wealth has value only when spent personally, and that is when it will be taxed.
You told it to me once. It is the difference between someone who is a big believer and a fanatic.
That is correct.
Mr. Speaker, I will yield to the gentleman from Iowa for any closing remarks he might have.
Mr. Speaker, I thank both my colleagues for their help. This has been an illuminating discussion and we need to do it again.