Congressman John Linder    FairTax Information

The FairTax Plan is fair. It contains a rebate of the sales tax for every household, which would totally rebate the tax consequences of spending up to the poverty line. This rebate mechanism ensures that every household could buy necessities untaxed and totally untaxes the poor. All Americans receive equal, fair treatment. If Bill Gates wants to move to a farm and grow his groceries and live off the rebate what do we care? We'll borrow his money and create jobs.

The FairTax plan is simple. The FairTax eliminates the more than 10,000 pages of complexities in the current income tax code once and for all, replacing them with a simple uniform sales tax.

The FairTax plan is a voluntary tax system. Every citizen becomes a voluntary taxpayer, paying as much as they choose, when they choose, by how they choose to spend.

The FairTax plan creates transparency within the tax code. The FairTax eliminates the hidden tax component from the prices of goods. According to a Harvard study, the current tax component in our price system averages 22 percent, meaning that the least well off among us lose 22 percent of their purchasing power. Any system that burdens business with any payroll tax, income tax, or compliance costs embeds that cost in our price system. By abolishing the IRS and abolishing the income paradigm in favor of a consumption paradigm we let the market drive the tax component out of the price system.

Moreover, knowing how much we pay in federal taxes on every purchase we mmake would make all Americans more aware of the cost of government. The next tax increase will not be able to be sold with the argument that it only applies to the top two percent of Americans. The reason for any future tax increase must be so compelling that my mother would be willing to pay for it.

The FairTax plan is border neutral. Under a national sales tax, imported goods and domestically produced goods would receive the same U.S. tax treatment at the checkout counter. Moreover, our exports would go abroad unburdened by any tax component in the price system.

The FairTax plan is industry neutral. There is not a good reason that our neighbor who builds a bookstore, hires our kids, votes in our elections and supports our community should be placed at a seven percent disadvantage against Amazon.com. Governors have a keen interest in this due to the loss of hundreds of millions of dollars in revenue to the Internet and catalogue sales. A national scheme would collect that.

Nor, is there a good reason why I, as a dentist, didn't have to collect a sales tax in Georgia while my neighbor, the retailer, did. The first principle of government ought to be neutrality.

The FairTax would strengthen Social Security. All of the sophistical arguments about partial private investments saving Social Security seem to miss an important point-- we will increase the number of retirees in the next 30 years by 100 percent and increase the number of workers supporting them by 15 percent. That system will only survive by dramatically reducing benefits, increasing taxes, or increasing the number paying into it.

Under the Fairtax, Social Security benefits would be paid out of the general sales tax revenues. The sales tax would be collected from 282 million Americans and 51 million visitors to our shores. Revenues to Social Security and Medicare would double, as we expect the size of the economy to double, in 13 to 14 years under the proposal.

The FairTax plan has manageable transition costs. The only transition rule we envision is to allow retailers to use inventory on hand December 31 as a credit against collecting taxes on sales in the new year, on the principle that things should only be taxed once and goods produced before the transition would already have the current tax embedded in them.

According to the U.S. Census Bureau, at any given time, U.S. businesses have about $1.1 trillion in inventory on hand at any given time. not collecting taxes on that inventory would cost the treasury about $300 billion. Compare that to any estimates of transition costs just trying to bring some private investment into Social Security alone. According to the Social Security Administration, the 75-year unfunded liability in Social Security is nearly $5 trillion. Remember this proposal fixes Social Security in 13 to 14 years.

Beyond the above arguments, what will the new paradigm do in our present economy? Passing the FairTax does several things that will directly affect the market.

1. We spend $250 billion a year on compliance with the tax code. Most of that is spent by corporate America and high-income investors. The savings that accompany a simpler tax system will go to the bottom lines and investment for job creation.

2. Corporate America spends additional billions calculating the tax implications of business decisions. That savings will go to the bottom line.

3. Eliminating the income tax will bring long-term interest rates down to municipal bond rates by 30 percent. That is good for corporate profites and the market.

4. What do you think will happen to the stock market if all the world's investors could invest in our markets with no tax consequences?

5. Having no complicated depreciation schedules, no Alternative Minimum Tax, no credits and deductions to confuse investors, and no tax or compliance costs forces a whole new look at corporate accounting. Only three numbers have meaning: earnings, expenses and dividends. (I really believe that this is the most salutary thing about the Fairtax. It makes it easier for shareholders to evaluate and monitor the companies they own.)

6. Deficits spook the market. Instead of a 19 percent decline in collections in the first quarter we would have had a 5.6 percent increase in revenues because that was how much the economy grew. We would have also had a 1.4 percent increase in the 4th quarter of 2001. (A study from 1945 to 1995 shows that the consumption economy is a far more predictable revenue base than the income economy, which has much higher amplitudes of volatility.)

7. The FairTax would bring a 26 percent increase in exports in the first year as well as a 76 percent increase in capital investment. Capital investment increases lead to increases in productivity and then increases in real wages.

8. In a study by Princeton Econometrics, 500 European and Japanese corporations were asked how their long-term planning would be impacted if the U.S. eliminated all taxes on capital and labor and only taxed personal consumption-- 80 percent said they would build their next plant in the U.S. (This also would eliminate the flight we are seeing from this country by corporations and wealthy individuals. They would be flocking here instead.)

How does the FairTax compare to other fundamental tax reform ideas? The FairTax is decidedly simpler and fairer than flat tax in 1913. Since then, it has been amended over and over, resulting in the very plan you are working to correct today. In 1986, we eliminated most deductions and drastically lowered tax rates to only two levels. We have amended the code over 6,000 times since then. I know that you recognize the need for a more fundamental change-- we have walked the flat tax before, to no avail, and it simply does not make sense to implement the same mistake again.

Other sales tax proposals leave in place the payroll tax-- the largest hidden tax component in the prices of our goods and services. The FairTax would completely eliminate these hidden taxes, allowing competition to bring prices down an average of 20-30 percent and increasing the transparency of the tax system.

Selling points:

• Because of the tax component incorporated into the prices under the current income tax code, we are already paying the equivalent of the FairTax!

• The FairTax eliminates payroll taxes, which are the most regressive of existing taxes.

• The FairTax is a tax on accumulated wealth. However, the holders of accumulated wealth are already paying it. It is just hidden.

On politics: We had a landslide in 1994 because nine million additional voters turned out hoping that the Contract with America was real. It was. Would you like to see them back? Put this issue on the agenda with presidential leadership.

It would change the entire political environment if we changed the subject.