Read GOP lips: No more IRS -- Hastert hints of Bush's secret plan to end income tax

That's the question many in this town are asking about House Speaker Dennis Hastert's proposal to eliminate the income tax and abolish the Internal Revenue Service in a second Bush administration.

In his upcoming book, "Speaker: Lessons from Forty Years in Coaching and Politics," Hastert says the bold move – sure to be immensely popular with voters – will be the centerpiece of President Bush's domestic agenda in a second term.

Hastert, for his part, says he will push for replacing the nation's current tax system with a national sales tax or a value added tax.

"People ask me if I'm really calling for the elimination of the IRS, and I say I think that's a great thing to do for future generations of Americans," he writes in "Speaker," set for release tomorrow.

House Majority Leader Tom DeLay, R-Texas, offered a preview of the House GOP leadership's post-election tax agenda in a March speech in which he said the Republicans are determined to repeal the federal income tax.

Long an advocate of a national sales tax, a confident DeLay told a conference of tax lobbyists that House Republicans will have hearings and push the issue in 2005 and 2006.

He said that replacing the income tax, payroll and other related federal taxes would provide more money for people to use, and he endorsed a proposal from Rep. John Linder, R-Ga., for a national sales tax.

Yet, even as Republican leaders in the GOP-led House, Senate and Bush White House have praised the concept of tax simplification over the last 3 1/2 years, the U.S. tax code has been expanded by over 10,000 pages as the Bush tax cuts and other changes – part of a total of 227 changes to the code – were implemented.

"Pushing reform legislation will be difficult," admits Hastert. "Change of any sort seldom comes easy. But these changes are critical to our economic vitality and our economic security abroad."

Americans for Fair Taxation has been pushing the plan for years. Recently, the group has been pushing H.R. 25 as the vehicle.

"The current federal income tax system is broken. Patching up the existing code is pointless. It's time for a fresh approach, a fair approach. It's time for the FairTax," says the group's website. "From its humble beginnings, the income tax has grown like a cancer by taxing our hard work and discouraging savings and investment."

H.R. 25 would eliminate the federal income tax and replace it with a 23 percent consumption tax paid by the end user. That means business-to-business purchases for the production of goods and services would not be taxed. The organization estimates consumer prices will drop by an estimated 20-30 percent as a result of the change.

The group's website describes how the bill's rebate function works. It assures that those living in poverty would not pay any tax.

"Under the FairTax, no American will pay taxes on necessities. The rebate will be equivalent to the tax paid on essential goods and services. The rebate will be mailed before the tax is actually paid [and] will be paid in equal installments at the beginning of the month. The size of the monthly rebate will be determined by the federal poverty level for a particular household size."

The bill's Senate version is S.1493, sponsored by Sen. Saxby Chambliss, R-Ga., was introduced last year.

"If you own property, stock, or, say, one hundred acres of farmland and tax time is approaching, you don't want to make a mistake, so you're almost obliged to go to a certified public accountant, tax preparer, or tax attorney to help you file a correct return. That costs a lot of money," writes Hastert. "Now multiply the amount you have to pay by the total number of people who are in the same boat. You can't. No one can because precise numbers don't exist. But we can stipulate that we're talking about a huge amount. Now consider that a flat tax, national sales tax, or VAT would not only eliminate the need to do this, it could also eliminate the Internal Revenue Service (IRS) itself and make the process of paying taxes much easier."

Would a campaign promise to eliminate the IRS be taken seriously? If the Bush administration were really planning such a dramatic move in a second term, why would campaign officials not be making more of it? Could Bush really deliver on a promise so bold?

These were some of the questions being asked around the Capitol today. Nevertheless, the leak from Hastert is sure to sell books.

"By adopting a VAT, sales tax, or some other alternative, we could begin to change productivity," Hastert continued. "If you can do that, you can change gross national product and start growing the economy. You could double the economy over the next fifteen years. All of a sudden, the problem of what future generations owe in Social Security and Medicare won't be so daunting anymore. The answer is to grow the economy, and the key to doing that is making sure we have a tax system that attracts capital and builds incentives to keep it here instead of forcing it out to other nations."

People would be intimidated by a 23% tax at the cash register especially the majority that live hand-to-mouth.
An underground economy would be inevitable.

No more inevitable than it is right now.

Tax Evasion: The Underground Economy:

http://www.fairtaxvolunteer.org/smart/under_economy.html

The FairTax and Tax Evasion
Opponents of the FairTax like to assert that a federal sales tax would increase tax evasion. It is more likely, however, that the FairTax would increase tax compliance while reducing compliance costs at the same time. It is impossible to argue in good faith that the current approach is doing its job since the problem is getting worse with the passage of time despite major and ever more intrusive attempts to address the problem.

Estimated Tax Gap by Source[14] for 1981 and 1992, in Current Dollars (Dollars in millions)
Description	1981 Tax Gap Amount	1992 Tax Gap Amount
Individual filers Wages and salaries	$2,378	$1,919
Interest	1,969	1,891
Dividends	2,075	2,142
State tax refund	127	102
Alimony	124	253
Capital gains	1,822	11,535
Form 4797	217	1,264
Pensions and annuities	456	144
Taxable unemployment	107	388
Farm income	2,350	1,909
Partnership income	2,755	2,246
Small business (S) corporation	912	729
Estates and trusts	49	73
Rents and royalties	2,012	4,481
Non-farm sole proprietors	18,714	30,173
Other income	4,366	3,465
Taxable Social Security	0	44
Adjustments to income	752	694
Deductions	3,540	3,889
Exemptions	1,844	2,224
Credits	1,313	1,274
Math errors	487	1,521
Individual non-filer tax gap	5,231	10,233
Individual remittance gap	8,300	11,400
Total individual tax gap	$61,900	$93,994
Small corporation tax gap	4,461	6,999
Large corporation tax gap	8,638	23,716
Unrelated business income gap	56	218
Fiduciary tax gap	111	202
Corporate remittance gap	800	2,000
Total corporate tax gap	$14,065	$33,135
Total tax gap	$75,966	$127,129

Some of the problems regarding the underground economy that exist under the income tax would remain under the FairTax, particularly those involving cash transactions made in the illegal economy or with the explicit intent of evading taxation. However, as the costs of compliance shrink and the perceived fairness of the tax system increases, some of the hostility to the tax system will decline. People who are in noncompliance because they perceive the present system as unfair or illegitimate may choose to comply with the FairTax. Most importantly, because of lower marginal tax rates, the benefit from lawful tax avoidance or illegal tax evasion will be much less at the margin relative to either the present system[15] or competing alternative tax systems, such as the USA Tax or flat tax[16], that have higher marginal tax rates, particularly on wages or self-employment income.[17] Research has confirmed the intuitive relationship between higher marginal tax rates and higher rates of evasion.[18] Lower rates, all other things being equal, imply lower evasion because the benefits from evasion decline while the costs of evasion remain comparable.

Much is made from the fact that a federal sales tax would place the responsibility for tax collection with the retailer, a sector of the economy in which small businesses are better represented. Small businesses are viewed as more likely to evade taxes since the owner, and beneficiary of tax evasion, is more likely to also be responsible for keeping the books and filing the tax returns. While there is, of course, some truth to the proposition that evasion rates among small businesses are higher, it is highly implausible to suggest that evasion would increase under the FairTax. First, those small businesspersons that are inclined to cheat on their sales tax are probably already cheating on their income tax and would be inclined to do so under any tax system. Second, the economic importance of small firms in the retail sector is usually grossly overstated According to the Joint Committee on Taxation (JCT), small firms only account for 14.9 percent of gross receipts by all retailers, wholesalers and service providers.[19] Since the gross receipts of wholesalers would not typically be subject to tax, the true scope of the small "problem" companies is smaller still. However, sole proprietorships, perhaps the most likely to evade tax under the present system and under the FairTax, are not included in the JCT figures.

Share of Total Gross Receipt by Firms with less than $1 million of Gross Receipts[20] ($ millions, 1993)
Industry	Entity Type	Firm Sales Under $1 mil.	Firm Sales All Firms	Small Share Percent
Retail and Wholesale Trade	C Corp.	116,929	2,663,541	4.4%
Services	C Corp.	91,383	610,438	15.0
Retail and Wholesale Trade	S Corp.	358,566	959,501	37.4
Services	S Corp.	98,721	283,680	34.8
Retail and Wholesale Trade	Partnership	22,938	112,112	20.5
Services	Partnership	30,783	187,588	16.4
Total	Combined	719,319	4,816,860	14.9

Third, the necessary corollary of the tax collection point being concentrated at retail establishments, rather than with individuals or other businesses, is that there are fewer points where revenue agents must concentrate their enforcement efforts. The collection points in the FairTax system would be perhaps 10 percent of those under the current income tax system or other alternative tax systems.[21] Because the number of collection points is so much lower, if enforcement funding is held equal then the audit rate for potential evaders would increase considerably, and the likelihood of them being apprehended is correspondingly higher. In other words, the risk of detection would increase and risk-adjusted cost of evasion would increase. Increased evasion due to the greater concentration of small businesses in the retail sector would be outweighed by greater compliance due to greater simplicity and perceived legitimacy of the tax system, from reduced temptation due to lower marginal tax rates, and from higher risk of detection due to a smaller taxpayer population. Fourth, some small business owners evade taxes because they feel the present system is unfair or overly complex and burdensome, or that they have been wronged by the system. They are much less likely to feel that way about the FairTax. Fifth, and perhaps most importantly, the marginal benefit from evasion will decline under the FairTax since the marginal tax will decline. Thus, the incentive to cheat will decline markedly.

Any one of the 118 million income tax filers can cheat the income tax system today, and a great many do so. Under the FairTax, however, only retailers (about 14 million-tax filers altogether) would be in a position to cheat In addition, the vast majority of retail sales, 90 percent, are made by large firms that are less likely or find it more difficult to cheat. A retailer who cheats under the income tax system has very similar, if not the same financial gain, as a retailer who cheats under the FairTax system. If a retailer under the FairTax system, failed to report taxable sales, the government would lose and the evader would gain by an amount equal to the sales tax on the good or service purchased. In an income tax system, the government loses and the evader gains by an amount equal to the marginal income tax rate times the amount not reported. An income tax evader will see his taxable income go down dollar for dollar, for every dollar of income not reported. Typically, failing to report a small fraction of a business' gross income will be sufficient to drive its reported profit to zero.

Even if, however, we were to make the unlikely assumption that evasion rates would be higher under the FairTax system than under an income tax system, they would have to be much higher to justify the income tax's huge compliance costs (estimated to be over $225 billion in 1996), many of which are incurred by businesses and are deductible as a business expense. Moreover, if compliance proved to be a problem, information reporting along the lines of present law (1099's) could be implemented to facilitate cross-checking by government auditors. These 1099s would reflect the quantity of product sold to retailers. An auditor could then ensure that the retailer's books either reflected a sale of these products or that the products were in inventory. The FairTax requires all businesses (including non-retailers) to keep business records kept in the ordinary course of business that would aid cross checking by government auditors.[22]

Conclusion
Tax evasion will undoubtedly be a problem under any tax system. It is a major and growing problem under the current tax system, despite very substantial efforts and increasingly harsh treatment of the taxpaying public. Almost 40 percent of the public, according to the IRS, is out of compliance with the present tax system, mostly unintentionally due to the enormous complexity of the present system. This breeds disrespect for the tax system and the law, and makes a system based on taxpayer self-assessment less and less viable.

The FairTax is likely to reduce rather than exacerbate the problem of tax evasion. The increased fairness, transparency, and legitimacy of the system will induce more compliance. The roughly 85 to 90 percent reduction in filers will enable tax administrators to address instances of noncompliance more effectively, and increase the likelihood that tax evasion will be discovered. The relative simplicity of the FairTax will promote compliance. Businesses will need to answer one question to determine the tax due: how much was sold to consumers? Finally, the dramatic reduction in marginal tax rates will reduce the gains from tax evasion. If the cost of noncompliance remains comparable (or even increases due to the increased likelihood of getting caught caused by the much smaller number of filers), then both the expected profit from and frequency of tax evasion will decline.

Footnotes:

[15] For 2000, the 28 percent marginal rate is effective on taxable incomes of $43,850 for joint filers and $26,250 for single persons. The top federal tax rate, of course, is 39.6 percent.

[16] The USA Tax has a top marginal tax rate of 40 percent (actually an effective rate of 32.35 once the payroll tax credit is considered) that takes effect at relatively low taxable income levels. Even a relatively low flat tax rate of 17 percent, plus the 15.3 percent payroll tax, yields a marginal tax rate of 32.3 percent until the Social Security wage base is reached and 19.9 percent thereafter (including the 2.9 percent Medicare tax). At a 20 percent flat tax rate (the beginning rate under the Armey plan), the lowest marginal tax rate is 22.9 percent and 35.3 percent for most middle class wage-earners.

[17] For a particular taxpayer, the marginal benefit from failing to report a given amount of gross receipts under an income tax and a given amount of gross receipts under the FairTax are the same. Under an income tax, the taxpayer will reduce his taxable income one for each dollar not reported. In the FairTax, failing to report sales receipts would also reduce taxable receipts dollar for dollar. Although the problem of falsifying deductions or deducting personal items as a business expense does not arise in the FairTax, the corresponding problem in the FairTax is using a business to attempt to purchase personal goods and services on a tax-exempt basis.

[18] See, e.g. "Estimating the Underground Economy: A Critical Evaluation of the Monetary Approach", Peter S. Spiro, 42 Canadian Tax Journal 1059–1081 (1994); "The Underground Economy in the United States: Annual Estimates, 1930-80", Vito Tanzi, 30 International Monetary Fund Staff Papers 283–305 (June 1983).

[19] IRS Statistics of Income, reported in "Impact on Small Business of Replacing the Federal Income Tax," Joint Committee on Taxation, April 23, 1996, JCS-3-96, pp. 109–127.

[20] Ibid.

[21] See note 3, supra.

[22] State governments, particularly with respect to tax due on out-of-state purchases by businesses, currently use this method. State sales taxes are, unfortunately, often applied to business inputs.

It must be noted here that the RATE is not a commentary on the rightness or the efficiency of the form of taxation in this case. It is a commentary on spending directly.

So where do we want to start cutting?

23%........... Effective total federal tax rate with respect to consumption expenditure

14.91% ..... rate if Social Security and Medicare were eliminated
14% .......... rate if Nat'l Endowment for the Arts were eliminated
11.9%........ rate if Dept. of Education were eliminated
10% .......... rate if welfare were eliminated
9.8%.......... rate if foreign aid were eliminated
etc.

So lets look at what the maximum it would take to fund those functions clearly authorized under Article I Section 8 of the Constitution, in current dollars:

http://w3.access.gpo.gov/usbudget/fy2001/guide02.html#Spending

$334 Billion --- Defense & Military related expenditure
$ 31 Billion ---- Administration of Justice
$ 16 Billion ---- General Government
$199 Billion ---- Interest on the Debt
=========================
$580 Billion ---- Total

Institute an across the board, Flat rate, single stage National Retail Sales Tax, which taxes all imports and domestic products with the same rate.

Replacing all current federal tax law with a retail sales tax would be 23% on new goods and services paid and receipted at the retail register. No hidden tax, no exceptions, exemptions everyone participates.

Such a tax acts in a natural manner to encourage the elimination of excess government functions through visibility of burden among all constituencies of the electorate.

The total federal government budget would move from $2,000 billions towards something less than $580 billions calculated.

The across the board federal tax rate on new goods and services would decline towards less than 6.7%.

As tax rate on sales decreases the economic burden on retail items, the sales volumes and growth in the economy would be tremendous allowing even further reductions in tax rates below that less than 6.7% theoretic level.

That is what I perceive as the ultimate achievements possible under a National Retail Sales Tax structured in the manner of the revenue bill H.R.25. Simple common sense applied to the principal of TANSTAFFEL,( no free lunch, everyone participates in paying their way in proportion to the benefit the extract from their consumption.) encourages the natural change in attitudes required of the electorate as regards the burden of government largess in their lives.

Thomas Hobbes from Leviathan

It is fairer to tax people on what they extract from the economy, as roughly measured by their consumption, than to tax them on what they produce for the economy, as roughly measured by their income

Hmmmmmm....... It's do able, with time and effort, once the blinders are removed from the electorate.

Could someone explain what the VAT is? I's dum! ;)

Its a good question, a lot of people do not understand what a VAT actually is.

Definition [ http://www.encyclopedia.com/articles/13330.html ]:

value-added tax
levy imposed on businesses at all levels of production of a good or service, and based on the increase in price, or value, added to the good or service by each level. Because all stages of a value-added tax are ultimately passed on to the consumer in the form of higher prices, it has been described as a hidden sales tax. Originally introduced in France (1954), it is now used by most W European countries.

The current income/payroll tax structure now in place is a subtraction method VAT, in that it is a levy imposed on businesses at all levels of production, it is passed on to the consumer hidden in the price of goods and services(more than 22%[the lowest estimate that prices would fall with enactment of the NRST] of the price of all goods and services), lower wages, lower returns on investment for investors, and higher interest rates(as much a 25% greater than they would be under the NRST).

OTOH; The NRST is a single stage(Retail), single rate(23%), visible to the consumer tax, on the "retail" sale of new(untaxed) goods and service. It is not a VAT and is expressly paid by the consumer not the business and is completely visible to the consumer by a receipt mandated by the law. The NRST does not tax purchases made for investment or business purposes.

Purpose of the NRST is to replace all Federal income/payroll taxes and gift/estate taxes with a single tax levied on all new goods and service once and only once at the retail level paid by the final consumer(the purchaser) of those goods or services. Goods that have been previously taxed under the NRST (i.e. used) are not taxed on resale.

The NRST is a specific remedy and replacement for the current VAT we now pay in the form of inflation and lower income(i.e. the corporate income/payroll tax). The NRST repeals over 95% of all Federal taxes currently in place and replaces them with one simple, easy to administer and understand, Retail Sales Tax.

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. .

Collection of Value Added Tax

Issue: What Is the Best Way to Collect a Value Added Tax?
A value-added tax (VAT) generally is a tax imposed and collected on the value added at every stage in the production and distribution process of a good or service. Although a VAT may be computed in any of several ways, the amount of value added generally can be thought of as the difference between the value of sales and purchases of a business.

Several administrative systems could be used for a VAT: the credit-invoice method, the subtraction method, and the addition method. The credit-invoice method has been the system of choice in nearly all countries that have adopted a VAT. A subtraction-method VAT is also known as a business-transfer tax. The addition method is a mirror image of the subtraction method and will not be discussed here.

Credit-Invoice Method VAT. Under the credit-invoice method, a tax is imposed on the seller for all of its sales. The tax is calculated by applying the tax rate to the sales price of the good or service, and the amount of tax generally is disclosed on the sales invoice. A business credit is provided for all VAT taxpayers on all purchases of taxable goods and services (that is, on inputs) used in the seller's business. The ultimate nonbusiness consumer does not receive a credit for his or her purchases. The VAT credit for inputs prevents the imposition of multiple layers of tax on the total final purchase price. As a result, the net tax paid at a particular stage of production or distribution is based on the value added by that taxpayer at that stage of production or distribution. In theory, the total amount of tax paid with respect to a good or service from all levels of production and distribution should equal the sales price of the good or service to the ultimate consumer multiplied by the VAT rate.

To receive an input credit, a business purchaser generally is required to have an invoice from a seller containing the name of the purchaser and the amount of tax collected. At the end of a reporting period, a taxpayer may calculate its tax liability by subtracting the cumulative amount of tax stated on its purchase invoices from the cumulative amount of tax stated on its sales invoices.

Subtraction-Method VAT. Under the subtraction method, value added is measured as the difference between a business's taxable sales and its purchases of taxable goods and services from other businesses. At the end of the reporting period, a rate of tax is applied to this difference in order to determine the tax liability. The subtraction method is similar to the credit-invoice method in that both methods measure value added by comparing sales to purchases that have borne the tax.

The subtraction method differs from the credit-invoice method principally in that the tax rate is applied to a net amount of value added (sales less purchases) rather than to gross sales with credits for tax on gross purchases. A business's tax liability under the credit-invoice method relies on the business's sales records and purchase invoices, while the tax liability under the subtraction method may rely on records that the taxpayer maintains for income tax or financial accounting purposes.

"Not so, under Linder's NRST proposal (HR 25) -- previously taxed items would not be taxed again on resale."

I stand corrected.

I don't think it's a good idea. It will lead to widespread cheating, which will lead to a huge bureacracy that will spend a hundred dollars to make sure nobody's getting away with a nickel.

Fine. The alternative is what exists now with as much or more cheating, or a VAT and have no idea what your tax is and is as open to cheating as a NRST is by simply going to a cash economy as is done today.

However I suggest you read reply #102 before coming to any conclusion.

The issue is not how much government can extract from the citizen, rather it is one of empowering the citizen to control government the many legitimate means of avoiding taxes under an NRST, if that be your goal.

I discussed the importance of abolishing the income tax because of its tendency to form a habit of servility in the souls of a people that accepts it.

Servility of soul is bad not only in itself, it is also an open door through which will soon walk the abuses of ambitious government power.

Leaders who find themselves with governmental power over a servile people will be quick to conclude that such a people exist to serve them.

Alan Keyes 1999

Taxes & Government Spending:

"The income tax in effect makes us vassals to the government – the politicians decide how much income we can keep. No mere “reform” of this slave tax, such as flattening the rate, can correct its fundamental denial of control over our own money. Only the abolition of the income tax itself will restore the basic American principle that our income is both our own money and our own private business - not the government's."

"Replacing the income tax with a national sales tax would rejuvenate independence and responsibility in our citizens. True economic liberty and moral revival go hand in hand."

"A national sales tax would also put the American citizen back in control of national fiscal policy. The best way to curtail government spending is to cut taxes, because they can’t spend what they don’t get. But with a sales tax, we could deny funds to a spendthrift government – and give ourselves a tax cut – whenever we make the private choice to alter our spending and saving habits."

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