Posted on 05/10/2002 9:49:43 AM PDT by n-tres-ted
Testimony Before the Subcommittee on Select Revenue Measures of the House Committee on Ways and Means
Hearing on the Extraterritorial Income Regime
May 9, 2002
Thank you Mr. Chairman and members of the committee. I am Herman Cain, Chairman of Godfather’s Pizza, Inc., a chain of 600 small businesses, Chief Executive Officer of T.H.E., Inc., a leadership consulting company, and, I am a member of and speaking on behalf of Americans For Fair Taxation. I appreciate the opportunity to testify before your committee on “promoting the global competitiveness of US businesses in the global market place.”
There are two basic issues for multinational corporations in the global market place. First, they are at a competitive disadvantage due to the imbedded costs of taxes on corporate profits, and taxes on payroll for domestically produced products. Secondly, the variations in tax law from country to country create many complex and costly inconsistencies. In fact, the extremely high cost of compliance may actually exceed the amount of taxes paid. The net result is that billions of dollars of foreign profits by US businesses are stranded overseas, which cannot be economically repatriated to benefit our domestic economy. The solution is not more laws, more regulations, or even more tax treaties with more countries. The solution is a new tax system, which would eliminate these issues.
The current income tax system cannot be reformed. It creates disadvantages for multinational businesses, domestic businesses, individuals, and our government. No amount of tinkering with a portion of the tax code is going to fix it. It is too complicated. It inflates the costs of US goods and services to other nations. It is too unfair and inefficient. It discourages people from working harder to achieve upward economic mobility, which destroys hope and opportunity. The current tax system needs to be replaced. It can be replaced with The FairTax (H.R. 2525), which was reintroduced in the House in 2001 by Congressmen John Linder of Georgia, and Colin Peterson of Minnesota.
Several commissions over the last 20 years, including the one I served on in 1995 (The National Commission on Economic Growth and Tax Reform), have all concluded that a replacement tax system should satisfy six principles. First, it should promote economic growth by reducing marginal tax rates and eliminating the tax bias against savings and investments. Second, it should promote fairness by having one tax rate and eliminating all loopholes, preferences and special deductions, credits and exclusions. Third, it should be simple and understandable. Simplicity would dramatically reduce compliance costs and allow people to truly comprehend their actual tax burden. Fourth, it should be neutral rather than allowing misguided officials to manipulate and micromanage our economy by favoring some at the expense of others. Fifth, it should be visible so it clearly conveys the true cost of government and so people would not be subjected to hidden changes in the tax law. Sixth, it should be stable rather than changing every year or two so people can better plan their businesses and their lives. Before expanding on each principle, consider the compelling advantages of replacing the current income tax code with The FairTax.
Gross Domestic Product (GDP) would increase 10.5% in the first year and level off in succeeding years at approximately 5% annually. (Dr. Dale Jorgenson of Harvard University)
Consumer prices would decrease 20 to 30 percent by eliminating the nearly 250 billion dollars in annual compliance costs, and eliminating the taxes on corporate profits and labor (payroll taxes), which are imbedded in what we pay for goods and services. (Dr. Dale Jorgenson and other economists)
A single national sales tax rate on all new goods and services of approximately 24% (to be revenue-neutral) would replace the 1.7 trillion dollars of taxes on income.
Annual uncollected taxes of 210 billion dollars (IRS estimates) would not escape The FairTax. This amount grows by 12 billion dollars each year.
Taxes of 35 billion dollars on expenditures by non-residents would be collected.
Taxes from the “underground” economy would be a bonus to the federal treasury.
Imported goods would be treated the same as domestically produced goods. This means US businesses would be much less likely to locate their plants overseas.
All taxpayers would have an equal voice, not just people who can afford tax lobbyists and skilled tax accountants.
No taxes on the “poor” because basic necessities, as defined by the Department of Health and Human Services, would not be taxed by utilizing a rebate.
No taxes on earnings from a second job for someone who is trying to “get ahead.”
No taxes on education.
More time for Government to focus on national and international issues.
These advantages of a national sales tax on consumption have been well researched, analyzed and documented by some of the most respected business people, economists, and academicians in the country. Hundreds of thousands of citizens are now actively supporting a change from an income tax to a national sales tax on consumption. We are now seeking the political leadership and courage to make the greatest country in the world even greater.
See the more complete text by clicking on the URL. This and other testimony was given yesterday in Washington.
http://www.house.gov/ways_means/srm/107cong/5-9-02/5-9jorg.htm
I don't like the provisions at all (such as: The Proportional Labor Tax would tax labor income at a flat rate of 10.9%. The Efficient Capital Tax would tax capital income at an effective rate of 30.8%.) And if you look at his analysis, the Fair Tax produces almost the same amount of economic growth (second best of all proposals).
Think I'll pick up a Godfather's Pizza tonight.
Question 7. How do the welfare gains from EFFICIENT TAXATION OF INCOME compare with gains from consumption taxes? Answer: EFFICIENT TAXATION OF INCOME would have a larger impact than a Proportional National Retail Sales Tax and twice the impact of the popular Flat Tax proposal. Here are the numbers: EFFICIENT TAXATION OF INCOME $4.90 trillion Hall-Rabushka Flat Tax $2.06 trillion Progressive National Retail Sales Tax $3.32 trillion Proportional National Retail Sales Tax $4.69 trillion ****
I do not see why he would prefer his proposals to the much greater simplicity of the Fair Tax Act.
If you want on (or off) of my black conservative ping list, please let me know.
The FairTax (NST) would encourage Economic Growth
The FairTax would significantly enhance economic performance by improving the incentives for work and entrepreneurial activity and by raising the marginal return on savings and investments. Entrepreneurs and small business owners would be given greater access to capital, the life-blood of a free economy. Investments would rise, the capital stock would grow, productivity would increase and the output of goods and services would expand. The economy would create more and better paying jobs for American workers and take-home pay would increase considerably.
Although the magnitude of the economic growth generated by a single rate, neutral tax system causes lively debate among economists, virtually all agree that the large marginal tax rate reductions with a national sales tax combined with neutral taxation of savings and investments, would have a powerful positive effect on the economy.
For example, Dr. Dale Jorgenson of Harvard University conducted a research analysis (1997), which showed that a national sales tax would produce a 10.5% increase in Gross Domestic Product, a 76% increase in real investments, and a 26% increase in exports in the first year of a national sales tax enactment. Those increases would level off at 5%, 15%, and 13% respectively over the succeeding twenty-five years. Nothing promotes the competitiveness of US businesses more than growth in our national economy, more dollars to grow our businesses, and a level playing field for selling our products and services to other nations.
The FairTax would be Fair, untax the “Poor,” and untax Education
The FairTax would provide every household in America with a rebate of sales tax paid on necessities. Thus, The FairTax is progressive and every family is protected from tax on essential goods and services. Because of the planned rebate, those below the poverty line would have a negative effective tax rate and lower middle-income families would enjoy low effective tax rates.
The responsibility of paying taxes to fund our way of life would be fairly distributed. It would, in fact, be much more fairly distributed than the income tax. Wealthy people spend more money than other individuals. The FairTax will tax them on their purchases and as a result, the wealthy pay more in taxes. If, however, they use their money to invest in job creating businesses, or to finance research and development to create new products, (all of which help improve the standard of living of others), those activities would not be taxed. The FairTax is premised on the notion that it is fairer to tax individuals when they consume for themselves above the essentials of life, rather than when they invest in others or contribute to society.
The FairTax would in effect give a supercharged charitable contribution deduction because people would be able to give to their favorite charity free of any income tax, payroll tax or sales tax. The charitable deduction today allows people to make their contributions with pre income tax dollars, but after payroll tax dollars. For the three-quarters of Americans who do not itemize, most must today earn $155 to give $100 to their favorite charity or to their place of worship. [1] Under The FairTax, they must earn only $100 to give $100, since under The FairTax what you earn is what you keep and charitable contributions are not taxed.
Education is one of the keys (along with savings and hard work) to an improved standard of living. That certainly was true in my case. I was the first person in my family to attend and graduate from college. It took a lot of hard work, and a lot of sacrifice by my parents. The FairTax is education friendly and is dramatically more supportive of education than current law. The FairTax embodies the principle that investments in people (human capital) and investments in things (physical capital) should be treated comparably. The current tax system, in stark contrast, treats educational expenditures very unfavorably.
Education is the best means for the vast majority of people to improve their economic position. It is the most reliable means people have to invest in themselves and improve their earning potential. Yet the tax system today punishes people who invest in education, virtually doubling its cost. Only a national sales tax on consumption would remove this impediment to upward mobility. No other tax plan would do so.[2]
Today, to pay $10,000 in college or private school tuition, a typical middle-class American must earn $15,540 based only on federal income taxes and the employee payroll tax.[3] The amount one must earn to pay the $10,000 is really more like $20,120 once employer and state income taxes are taken into account.[4]
The FairTax would not tax education expenditures. Education would be paid for with pre-tax dollars. This is the equivalent of making educational expenses deductible against both the income tax and payroll taxes today. Thus, a family would need to earn $10,000 to pay $10,000 in tuition, making education much more affordable (not considering state income taxes on education). The FairTax would make education about half as expensive to American families compared to today.
The FairTax would improve upward mobility but no longer punish work, savings, investments or education. It would better enable people to improve their lives. It would no longer hold people back.
The FairTax would be Simple The FairTax is a simple tax. Individuals who are not in business would have absolutely no compliance burden, nor would they be subject to the discretionary interpretation of the current convoluted tax code. As for businesses, it puts many fewer administrative burdens on businesses. In fact, filling out The FairTax tax return is comparable to filling out line one (gross revenue) of an income tax return. There would be no more alternative minimum tax, no more depreciation schedules, no more complex employee benefit rules, no more complex qualified account and pension rules, no more complex income sourcing and expense allocation rules, no more foreign tax credit, no more complex rules governing corporate acquisitions, divisions and other reorganizations, no more uniform capitalization requirements, no more complex tax inventory accounting rules, no more income and payroll tax withholding and the list goes on. Businesses would simply need to keep track of how much they sold to consumers.
Compliance costs would, therefore, fall under The FairTax. Today, according to the Tax Foundation, we spend about $250 billion each year filling out forms, hiring tax lawyers, accountants, benefits consultants, collecting information needed only for tax purposes and the like. These unnecessary costs amount to about $850 for every man, woman and child in America. To the extent these costs are incurred by businesses, they must be recovered and consequentlyare embedded in the cost of everything we buy. The money we spend on unnecessary compliance costs is money we might as well burn for all of the good it does us. The Tax Foundation has estimated that compliance costs would drop by about 90 percent under a national sales tax.
The FairTax would be Neutral
Under The FairTax, all consumption would be treated equally. The tax code punishes those who save and rewards consumption. Under The FairTax, no longer would the tax system be in the business of picking winners and losers. The tax code would be neutral in the choice between savings and consumption, neutral between types of savings and investments and neutral between types of consumption.
The FairTax would be Visible
The FairTax is highly visible, because there would be only one tax rate Congress could modify on all taxpayers at the same time. Moreover, all citizens would be subject to any tax increases, not just a targeted few. It would be much harder for Congress to adopt the typical divide-and-conquer, hide-and-disguise tax increase strategy it uses today. The FairTax would explicitly state the contribution to the Federal government each and every time a good or service is purchased.
The FairTax would be Stable
The FairTax would be more stable than the present system for two reasons. First, because it is so simple and transparent, it would not invite tinkering in the way that the current system with its thousands of pages of code and regulations does. People would resist attempts to make it more complex and attempts to favor special interests because they would understand what is going on. Second, taxing consumption is a more stable source of revenue than taxing income. There are fewer fluctuations in the consumption base than in the income base.
A recent study showed that for the years 1959 to 1995, a national sales tax base was less variable than the income tax base. Why? When times are unusually good, people will usually save a little more. People tend to smooth out their consumption over their lifetime. They borrow when young, save in middle age and spend more than their income in retirement.
Impact on Businesses
Businesses would utilize a zero corporate tax rate to create new jobs, grow their businesses, and be more competitive in the global market place. Their shareholders would not be taxed on dividends received from the corporation, or taxed on capital gains made on their investment in the business. This would stimulate business investments, creating more opportunities for working Americans. Compliance costs would be lower. Moreover, over time, most states would make their sales taxes conform to the federal sales tax, reducing the costs of complying with multiple rules in each state and political subdivisions.
If people were willing and able to purchase more goods and services in a healthy economy, they would spend more money at retailers. Spending and shopping is no longer a luxury activity, it is a part of our way of life. There is nothing that hurts businesses more than a slow economy and nothing that helps them more than a good economy. In this sense, The FairTax would help all businesses.
Currently, consumption purchases must be made with after-income-tax and after-payroll-tax dollars. The primary difference between a sales tax and an income tax is that the income tax doubles, triples or sometimes quadruples taxes on savings. Consumers would see their paychecks increase by nearly two trillion dollars. Since The FairTax is not a tax increase but is revenue neutral, the repeal of the income and payroll taxes, plus the decrease in consumer prices would provide consumers with the money necessary to pay for The FairTax.
Instead of having to comply with the complexities of the income tax, payroll tax, and various excise taxes, there would be one sales tax on all goods and services. Period. Retail businesses would simply need to calculate on a monthly basis its total retail sales. Retailers would receive an administrative fee (1/4 of one percent) for collecting the sales tax.
In summary, The FairTax would be a “win, win, win” for businesses, citizens, and government. Just consider the compelling nature of the advantages discussed earlier.
I realize that there are political and public hurdles to making such a change to how we fund our government. In fact, many people simply don’t believe that it can happen. They have given up on our government’s ability to do what is in the best interest of its people and our nation. To those people I ask, where would we be today if George Washington and the founding fathers had given up the fight to become an independent nation? We owe it to them, to ourselves, and most importantly to our children to correct a system that has gotten out of control.
Conclusion
People want to be able to dream and to pursue their dreams. People want the liberties for which our founding fathers fought and DIED. People want to pay their fair share to keep this Country safe and great. As Dr. Benjamin E. Mays, late President Emeritus of Morehouse College said, “It isn’t a calamity to die with dreams unfulfilled, but it is a calamity to have no dreams.” The current tax system not only destroys the ability of people to dream and make their dreams real, it causes too many people to just give up.
We need The FairTax -- a tax system more appropriate for a free society. The current tax code CANNOT BE REFORMED to achieve the stated objectives. It MUST BE REPLACED. Please use the power of the Congress to replace our current income tax code.
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[1] $155.40 less 7.65 percent in employee Social Security ($11.89) and Medicare payroll taxes less 28 percent in federal income taxes ($43.51) leaves $10,000.
[2] Neither the flat tax nor the USA Tax would remedy the current bias against education.
[3] $15,540 less 7.65 percent in employee Social Security ($1,189) and Medicare payroll taxes less 28 percent in federal income taxes ($4,351) leaves $10,000.
[4] Economists generally agree that the employer share of payroll taxes is borne by the employee in the form of lower wages. This figure assumes that employees bear the burden of the employer payroll tax and that they are in a seven percent state and local income tax bracket. $20,120 less $5,634 in income tax (28 percent), $3,079 in payroll taxes (15.3 percent) and $1,408 in state and local income taxes (7 percent) leaves $10,000.
Maybe when "ancient_geezer" gets online he can add some of his sources and help us understand the debate further.
Cain has done such a thorough job, it's kind hard to add to it. However for those who desire completeness, here is the index to all the testimony before the Ways & Means committee on the subject.
It should be carefully noted that the primary push of the testimony overall is to qualify our Coporate tax system under WTO guidelines as a WTO qualified "indirect tax". After pushing through the verbiage, most of the testimony comes down to praising a VAT with an individual income tax. In short the same ole shell game we have today with a push to move more taxation behind a veil of inflation where it is not visible to the voter.
They still want to play the political game of:
A government which robs Peter to pay Paul can always depend on the support of Paul.
-George Bernard Shaw
The siren call for representation without taxation is the formula that got us where we are at today. The ability to hide or disguise taxation from the view of large sectors of the electorate allows the Congress to get away with the creation of the evergrowing monster that it fosters.
Liberty and freedom have a price, responsibility. If that price is avoided there are no brakes on the growth of government, the ultimate result is the end of freedom through creeping socialism.
We need to end the shell game and take the blinders off the electorate, or expect government to continue it's growth without bound.
Walter Williams makes the bottom line case against the income/corporate tax shell game we now have:
Walter Williams, World Net Daily, 10-25-2000
According to the most recent U.S. Treasury Department figures, ... the top 50 percent ($36,000 and over) paid 96 percent of income taxes. Guess what the bottom 50 percent of income earners paid?
If you're among those who pay little or no federal income taxes, what do you care about tax cuts? Moreover, if you think tax cuts pose a threat to government handout programs, you might be openly hostile and support Al Gore's silly "risky scheme" talk. So many Americans paying little or no federal taxes makes for a natural spending constituency. It's like me in the restaurant: What do I care about extravagance if you're footing the bill?
The income/VAT case of the Europeans, and Jorgenson's "efficient taxation", perpetuate and indeed just make the problem worse not better.
Efficient Taxation should not be a goal in itself, The government has too much revenue as it is, it needs to be trimmed and impeded not enhanced for ever more additional growth.
Off my soapbox, here are the links to the Select Revenue Measures testimony:
| 1 | Committee on Ways and Means, Subcommittee on Select Revenue Measures, 5-9-02 Testimony Congress enacted the extraterritorial income exclusion (ETI) in response to World Trade Organization objections to the Foreign Sales Corporation (FSC) provision of the tax code. They state that a nation may have a border-adjusted "indirect" tax http://waysandmeans.house.gov/srm/107cong/5-9-02/5-9enti.htm |
| 2 | Committee on Ways and Means, Subcommittee on Select Revenue Measures, 5-9-02 Testimony The tax treatment of foreign income has become increasingly important in light of the WTO´s decisions regarding U.S. export subsidies, and growing controversies regarding corporate sheltering and corporate inversions. Export subsidies: I agre http://waysandmeans.house.gov/srm/107cong/5-9-02/5-9gale.htm |
| 3 | Committee on Ways and Means, Subcommittee on Select Revenue Measures, 5-9-02 Testimony 1. Fundamental tax reform through the EFFICIENT TAXATION OF INCOME consists of two parts, an Efficient Capital Income Tax and a Proportional Labor Income Tax. The Proportional Labor Tax would tax labor income at a flat rate of 10.9%. The Efficient Capit http://waysandmeans.house.gov/srm/107cong/5-9-02/5-9jorg.htm |
| 4 | Committee on Ways and Means, Subcommittee on Select Revenue Measures, 5-9-02 Testimony We could improve our tax system along all dimensions by replacing a substantial part of both individual and corporate income taxes with a consumption tax. Consumption tax proponents must abandon the fantasy that by enacting a consumption tax, we can comp http://waysandmeans.house.gov/srm/107cong/5-9-02/5-9grae.htm |
| 5 | Committee on Ways and Means, Subcommittee on Select Revenue Measures, 5-9-02 Testimony Once we have qualified our corporate tax as an "indirect tax", we can then exclude export income from U.S. tax. An "indirect tax" under WTO rules has a base equal to value added. Only two amendments are necessary to convert our existing corporate tax on n http://waysandmeans.house.gov/srm/107cong/5-9-02/5-9chri.htm |
| 6 | Committee on Ways and Means, Subcommittee on Select Revenue Measures, 5-9-02 Testimony The current income tax system cannot be reformed. First, it should promote economic growth by reducing marginal tax rates and eliminating the tax bias against savings and investments. The charitable deduction today allows people to make thei http://waysandmeans.house.gov/srm/107cong/5-9-02/5-9cain.htm |
| 7 | Committee on Ways and Means, Subcommittee on Select Revenue Measures, 5-9-02 Testimony In particular, higher marginal corporate tax rates in the United States and the double taxation of dividends puts U.S. firms at a tax disadvantage. Reducing corporate income tax rates and integrating the corporate income tax with the personal incom http://waysandmeans.house.gov/srm/107cong/5-9-02/5-9enge.htm |
| 8 | Committee on Ways and Means, Subcommittee on Select Revenue Measures, 4-10-02 Testimony The GATT Dispute Settlement Panel ruled that the DISC regime was a prohibited export subsidy. On November 15, 2000, Congress enacted the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 which repealed the FSC regime and put in its place the E http://waysandmeans.house.gov/srm/107cong/4-10-02/4-10chor.htm |
| 9 | Committee on Ways and Means, Subcommittee on Select Revenue Measures, 4-10-02 Testimony First, I am extremely pleased to have this chance to discuss with my former colleagues the critical issue of ensuring that U.S. international tax rules provide a level playing field for U.S. businesses to compete globally. Unfortunately, the most recent W http://waysandmeans.house.gov/srm/107cong/4-10-02/4-10arch.htm |
| 10 | Committee on Ways and Means, Subcommittee on Select Revenue Measures, 4-10-02 Testimony Today, the Select Revenue Measures Subcommittee begins its examination of the Extra-Territorial Income Exclusion Act, which replaced the Foreign Sales Corporation regime. Under such systems, only income earned within the home country is taxed; income earn http://waysandmeans.house.gov/srm/107cong/4-10-02/4-10mccr.htm |
| 11 | Committee on Ways and Means, Subcommittee on Select Revenue Measures, 4-10-02 Testimony The subsidy was initially provided by granting tax deferral for export income earned through a U.S. corporation that qualified as a Domestic International Sales Corporation (DISC). In 1984, Congress largely replaced the DISC subsidy with an subsidy for e http://waysandmeans.house.gov/srm/107cong/4-10-02/4-10mcin.htm |
| 12 | Committee on Ways and Means, Subcommittee on Select Revenue Measures, 4-10-02 Testimony The January 14, 2002, WTO Appellate Body Report in United States - Tax Treatment for "Foreign Sales Corporations" - Recourse to Article 21.5 of the DSU by the European Communities (the "AB Report") upheld the decision of the WTO panel that the FSC Replace http://waysandmeans.house.gov/srm/107cong/4-10-02/4-10garr.htm |
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