Statement of Herman Cain, Chairman, Godfather's Pizza, Inc.,

house.gov ^ | May 9, 2002 | Herman Cain

[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.

[ATOMIC_PUNK]

THE MAN Herman Cain

[Taxman]

Thanks for the ping.

Herman Cain's is a powerful voice calling for fundamental tax reform. He will be hard to ignore, and can, conceivably start a very large FTR snow ball rolling downhill.

Did anyone take Bill Gale's arguments apart at the hearing?

[mafree]

Thanks for the ping. We really should be doing more educating on the Fair Tax.

[goo goo g'joob]

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.

This, my friend is the primary motivation for the power/money grabbers to maintain the status quo!

Can you imagine the uproar when every "Joe" suddenly realizes how little they are getting in return for their hard earned money?

[Lazamataz]

goo goo g'joob

Much time has passed.

I finally have the perspective of time to make my decision.

Yes, I still like your screen name.

[Free the USA]

Thanks to you both and BTTT!

[Rockitz]

Unfortunately the 22% in taxes plus the difference in shipping and distribution is quickly overcome by the order of magnitude difference in wage rates between here and overseas. If we can make a widgit for $10, it can be made overseas for $1. If the taxes on that widgit and the cost to ship it are less than $9, it will be made overseas. If this country truly wants to compete, manufacturing laborers won't be making $30/hour they'll be making $10/hour and probably much less.

[n-tres-ted]

Hey, thanks! I hadn't seen that book, although I was somewhat aware of Mr. Cain's accomplishments and views. Anyone know whether C-SPAN will show those hearings?

[n-tres-ted]

All of those economic issues work their way through the market system on a decision by decision. The bottom line is that Americans cannot be better off when investment capital is being spent to build production plants overseas rather than here. Efficiency in production is important, and labor costs are an important element. But a burdensome tax system unfavorable to the investment of capital is presently the major element that determines the building of plants overseas. That is reflected by a study performed about five years ago and presented to the Chairman of the Committee on Ways and Means at the time showing a dramatic move of new investment capital to the U. S. under the Fair Tax. Take a look at this paper on the subject:

http://www.fairtax.org/pdfs/manufacturing.pdf

[Rockitz]

Unfortunately, the time constant associated with enacting each of those decisions is typically not treated appropriately in theoretical economic analyses. Now that infrastructure has been established overseas I suspect that a racheting down of wage rates in this country is inevitable along with a reduction in the standard of living. The subject tax proposal will serve to speed that process to the dismay of the unions and the workers they represent. Protected high technology and defense workers withstanding, this will be a very painful process for the average American worker that unknowingly has been the benefactor of current tax policy through the inflated wage rates it has produced. The proposal will most certainly have a globalizing effect on our economy that will reduce the mean standard of living of unskilled wage earners.

[n-tres-ted]

I think your analysis is invalid. The existing tax structure encourages the investment in foreign manufacturing capacity. Our tax reform proposal would greatly encourage investment here rather than overseas. I don't see how you can suggest reforming the presently harmful tax system would make the situation worse. It just doesn not follow.

[CliffC]

Calling for Tax Reform!

GoTo: PETITIONS! ...and sign 'em both. Do yourself a favor!

Ask others to visit the PETITIONS! site and sign 'em, too.

Cliff Cofer - West Des Moines, Iowa

---

Bye, bye... Income Tax (and IRS)! We won't miss ya' at all!

[Rockitz]

You missed my point. It's a perception issue. Payroll, corporate, et al. taxes disguise the true labor rate in this country. With the proposed tax reform, US labor rates will compare apples to apples with overseas labor rates. As it is now, US wages are publicly perceived to be much lower than they really are. With this proposed reform, the unions will not be able to get away with the semantics of apparent wage rates with respect to actual wage rates (which include payroll, corporate, et al. taxes). No real reduction in wage rates means continuing exodus of manufacturing capacity out of this country. True labor rate reductions, however, will maintain manufacturing in this country.

Shifting the tax burden to the consumer will indeed reduce the cost of manufacturing in this country only through real reductions in labor rates. For the consumer, the proposed tax reform is a boon. For the overpaid, unskilled, union worker in this country, it is a death knell which allows business to point out just how radically overpaid they are.

Until such time as true wage rates are reduced to a level whereby it is economically unviable to manufacture overseas, manufacturing will continue to go overseas to take advantage of cheap labor rates.

[Bounceback]

"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)."

What is more likely is that the cost of all the non-necessities will rise substantially with the added National Sales Tax, which is great only for those who do not consume.

Moreover, if certain "necessities" were not taxed, or subject to a rebate (incidently, when do the low income folk get their rebate - monthly, quarterly, annually?) lobbying efforts would begin immediately get more products and services on the "necessities" list.

And how is the zillion dollar casino industry, which has inspired federal and state and local governments with their 'added' income tax revenue, to be taxed? By the bet?

In other words, the cure-all is still subject to the tinkering that has turned the present system into what it is today.

[MarkL]

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.

This is one of those things that I've never understood. Why a "rebate?" Why not just making necessities tax exempt from the get-go?

Mark

[dread78645]

This is one of those things that I've never understood. Why a "rebate?" Why not just making necessities tax exempt from the get-go?

What would be "necessities" ?

Food ? steak & lobster versus hamburger & fish-sticks --both tax free ...
Clothing ? new tennis shoes for the kids vs. my Nicona snake-tip cowboy boots ?

The rebate side-steps any social futzing by the congressritters.
Everybody gets a rebate offset equivalent to the poverty level spending. After that, it's "luxury" spending.

A full discussion at Cato.org

[n-tres-ted]

Thanks for the clarification. I still think union workers will be better off with the reform than without it. They will get 100% of the paychecks just like everyone else. The new investment here in plants and equipment must make them better off than without it. And market forces will always make them have to be competitive in wages and productivity. Thanks again for responding and for your perceptions. I hope you will put your talents behind this Fair Tax legislation. I think its beauties are still in the process of being discovered.

[n-tres-ted]

The rebate achieves very important purposes: It makes sure the poorest people are not taxed until they have put food on the table and purchased other basic necessities. And it does this without making any American report his income in order to qualify for the rebate. With the proposed structure of the rebate, every one gets necessities without taxes up to the level of subsistence spending. Over that amount (such as the amounts and types of food, etc., richer folks would consume), sales tax will be paid. And we want individuals to decide where those basic expenditures are to be made. We do not want to get into the practice of exempting specific products and not others from the tax.

[n-tres-ted]

Frankly I don't know whether a casino would have to pay sales tax on gambling revenues as if the gambling were a "service" being finally consumed. Does anyone know the correct answer to that question?

[n-tres-ted]

bttt