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Some more words straight from the good doctor's mouth

SECOND IN SERIES ON THE EXTRATERRITORIAL INCOME REGIME

HEARING BEFORE THE SUBCOMMITTEE ON SELECT REVENUE MEASURES OF THE COMMITTEE ON WAYS AND MEANS HOUSE OF REPRESENTATIVES ONE HUNDRED SEVENTH CONGRESS SECOND SESSION

MAY 9, 2002

Mr. JORGENSON. Yes. I wanted to make a point again that I suggested in my earlier testimony. I think that if you think in terms of the potential impact of tax reform, the consumption tax achieves about 40 percent of that potential, and that is essentially with the most optimistic assumptions. I am overlooking all of the issues that Bill Gale just raised.
Another issue is why don't we have a consumption tax? As you remember, Chairman Archer held hearings for many years which many of us participated in. There is lots and lots of testimony about all the plans that have been discussed here about a consumption tax. The reason is because the tax rates are staggering.
For example, if you have a progressive national retail sales tax -- this is what Archer originally was interested in -- the marginal tax rate, the tax that you would have to collect on every dollar at the retail level -- just imagine this -- is 40 cents. That is what we are talking about. So, it is not a very practical idea. I think that is what led to the neglect of consumption tax reform when this issue was very thoroughly discussed by the Committee on Ways and Means in the middle 1990s.
I think you have really put your finger on the issue here. The issue here is not how to benefit the corporations which have been up to this point benefiting from the export subsidies that have now been struck down by the World Trade Organization, the issue here is how to enhance the productivity of the U.S. economy. We have an extremely productive economy. Since 1995 our economy has been growing at more than 4 percent a year. If you look at the way that productivity is behaving in the current recession, it is running at about 1.1 percent above what it has in previous recessions throughout the whole postwar period. We are in a new economy. What do we need to do to deal with the issues of a new economy? We need to focus on investment and how to stimulate investment, and that, it seems to me, is where the attention should be directed rather than toward a consumption tax.
source

"There is lots and lots of testimony about all the plans that have been discussed here about a consumption tax. "

Yep, including Armey/Shelby Flat Tax, numerous variations of VATs, transaction taxes etc. All discussed in the context of converting of WTO treatment of boarder adjustable taxes. Even the Corporate income tax is viewable as a "consumption" tax is the context Jorgenson is speaking of here.

http://www.taxfoundation.org/foundationmessage03-00.html

"The economic equivalence of an European-style VAT and a subtraction-method VAT is well-established. A subtraction-method VAT is essentially identical to a business income tax except that all purchases of plant and equipment may be expensed, rather than depreciated as under current U.S. law."

"the marginal tax rate, the tax that you would have to collect on every dollar at the retail level -- just imagine this -- is 40 cents. That is what we are talking about. So, it is not a very practical idea. I think that is what led to the neglect of consumption tax reform when this issue was very thoroughly discussed by the Committee on Ways and Means in the middle 1990s."

The good professor is right when one narrows a sales tax base by exempting some products and not others and not taxing services as many traditional state sales taxes do, a 40% marginal rate is what is to be expected.

OTOH, Linder's bill (H.R.25) is designed to specifically reach the broadest possible consumption taxbase for that very reason and specifically limits the federal marginal rate to 23%, while providing an environment that enhances investment and encouraging thift:

The beauty of H.R.25 is that it puts the voter in control control how much taxes he pays. If you happen to save, invest or spend a portion on used [previously taxed] items, one can easily get effective tax rate below 9%.

To illustrate examine the tax burden that a family of four can achieve at various annual expenditure levels.

And one really should look at all the testimony of that hearing.

Committee on Ways and Means, Select Revenue Measures Subcommittee, 107-77, Second in Series on the Extraterritorial Income Regime

Seems that every form of tax system under the sun was discussed pro and con. All the testimony should be reviewed, especially in context of what the hearing was about, creating a tax system that treats imports the same as the sale our own domestic manufacture, while removing the federal tax burdens embedded into our export goods and services.

The fact is, under a reasonable national retail sales tax system such as HR25 offers, businesses in those EU/WTO countries view as a real incentive to transferring manufacuring to our shores. Instead of the current trend we experience of jobs & manufacturing fleeing this nation.

Chairman of the House Ways and Means Committee,
Rep. Bill Archer (R-TX) 1996

"A recent survey was done, in Europe and Japan, of the major corporations and I was astounded at the results. They were asked, 'If the US abolished its income tax and went to a sales tax, would that have any impact on your decisions?' Eighty percent of the corporations said they would build their factories in the United States of America. Twenty percent said they would move their international headquarters to the United States of America."

the marginal tax rate, the tax that you would have to collect on every dollar at the retail level -- just imagine this -- is 40 cents.

Not to mention the marginal tax rate under the current federal tax system of more than 40cents collected on dollar earned.

As opposed to maximum of 23cents on the dollar spent that HR25 implements.

H.R.25, S.1493
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.