By John Linder
This article was originally published in The Blaze on 10/1/15 and is used with permission from John Linder. John Linder served in Congress for 18 years as representative from Georgia. He and his wife Lynne have retired to a farm in Northeast Mississippi. He is the original lead sponsor of HR-25, the Fair Tax Act.
The very specific tax reform proposals of Republican presidential candidates Donald Trump, former Florida Gov. Jeb Bush, and Florida Sen. Marco Rubio are thorough and similar. They each propose a simpler tax code with fewer deductions and lower tax rates. And they each support maintaining the tax on income.
Other candidates — namely Kentucky Sen. Rand Paul, Ben Carson, former Pennsylvania Sen. Rick Santorum, and Texas Sen. Ted Cruz — are less specific but also support a simpler, flatter income tax.
Democratic candidates former Secretary of State Hillary Clinton and Vermont Sen. Bernie Sanders have both committed to maintaining the tax on income. Both support increasing taxes on income and investment.
All of the above proposals fail to address the four huge economic distortions caused by our tax code. None deals with the criminal enterprise known as the IRS.
(1) The Mercatus Center at George Mason University estimates that the complex tax code costs Americans up to $1 trillion each year in compliance costs. That’s like paying for a dead horse. You get nothing for it. Our federal Treasury lost $500 billion last year due to unreported income. Some have called that inefficient. I call it stupid.
(2) Our tax code drives more than $2 trillion into the underground economy each year. That money participates in our economy without paying its share of the costs of government. It is common to think of the underground economy as drug dealers and pimps, but it’s much broader than that. Millions of dollars are unreported each year by maids, yard workers, and baby sitters. Additionally, millions of underemployed people are holding second jobs “off the books.” Several years ago, I was invited by the Ukrainian prime minister to fly to Kiev to discuss tax reform. The Ukrainian income tax system had become so onerous that fully half of the entire economy was underground.
As we continue to have higher taxes on fewer taxpayers, we will see more of our economy go underground, and billions more will go offshore.
(3) The International Monetary Fund says that there is $25 trillion sitting in offshore financial centers. Some of that was stolen from their governments by tyrannical rulers, but American individuals and interests control a significant portion of it. And it is offshore for a straightforward economic reason: The tax costs are too high to bring it home.
A few hundred Fortune 500 businesses have more than $2 trillion offshore because federal taxes would consume 35 percent of them when repatriated. A new plant might be built overseas simply because it could be built with pretax dollars.
I once discussed this with Federal Reserve Chairman Alan Greenspan. I asked him how long it would take for the offshore money to find its way into our banks and markets if we taxed consumption rather than income.
Greenspan responded: “Months.”
In our economy, those dollars would create millions of jobs.
It takes thousands of companies to get a loaf of bread to our table. A company mines ore to sell to a steel manufacturer who sells that to a sheet metal company who sells that to a truck or tractor manufacturer.
Another pumps oil out of the ground to sell to a refiner who sells to a distributer who sells to a retailer. You get the idea.
All of these companies have business costs such as labor, rent, transportation, etc. They also have payroll and income tax costs.
The only mechanism for a business to pay any of its costs is price. And the only real taxpayer in the entire world is the consumer who consumes the product and can’t pass the costs on. We are paying the income tax costs, payroll tax costs, and the accountants and attorneys to avoid the tax costs of each of the thousands of companies that it took to get that loaf of bread to our table.
(4) The extensive compliance costs and tax costs for businesses become embedded in our price system creating inflated prices at the checkout counter and a dramatic reduction in our purchasing power.
None of the tax reform proposals of any of the aforementioned presidential candidates will even address those four economic distortions.
Mike Huckabee* has proposed a tax reform that will solve them all. The FairTax eliminates all business taxes and all taxes on income and replaces them with a retail sales tax levied at the point of consumption. The IRS is abolished.
Eliminating the IRS will eliminate compliance costs as well as the embedded costs in our price system.
Eliminating taxes on income will bring trillions of dollars from offshore financial centers back into our banks and markets.
Taxing consumption will tax the underground economy.
Eliminating withholding taxes will give the average income earner an immediate 30 percent increase in take home pay. That, combined with lower prices from eliminating the embedded costs of the IRS, will give everyone a huge increase in purchasing power.
And the IRS will be just a bad memory.
* As a 501(c)(4) not-for-profit corporation, Georgians for Fair Taxation cannot endorse any candidate for elected office. We can provide information on a candidate’s position on the FairTax.