In Addition to Stupendous Growth, the Fair Tax Offers Anonymity

When it comes to tax reform in the new Congress, Senator Orrin Hatch (R-UT) is in the catbird seat. As chairman of the Senate Finance Committee he will drive the process in the Senate.

In a recent article he argues that the most important principles for reform were those followed by President Reagan nearly 30 years ago: economic growth, fairness and simplicity. He makes a cogent argument for a plan that has been discussed and studied in Congress for 15 years. It is called the FairTax. In the last Congress HR 25 had 75 sponsors in the House and S 122 had 8 sponsors in the Senate. Unfortunately Senator Hatch was not one of them.

Studies conclude that with the FairTax our economic growth in the first year will be about 10 percent. Capital spending will increase by 70 percent in the first year leading to more jobs and increased productivity. With no tax on savings or investment, the Fairtax will improve both.

In terms of fairness, the FairTax has no deductions and taxes everyone at the same level. To make the tax burden progressive the FairTax provides a distribution to every household, based on the size of the household, to offset the tax on necessities.

Simplicity? The FairTax requires no tax returns. No record keeping. No April 15th.

The problems our current code creates are much broader than deductions and paperwork. The tax code corrupts business decision-making and handicaps our ability to compete globally.

Every business owner can point to decisions he or she has taken for tax reasons rather than economic reasons. Additionally, a study by the Mercatus Center at George Mason University concludes that we spend upwards of a trillion dollars each year just complying with the code.

More damaging is the distortion created in our price system by the code. A Harvard study concludes that American prices are inflated by 22 percent due to the embedded costs of the current system. We are paying for the tax costs and compliance costs, and the accountants and attorneys to avoid the costs, of every one of the tens of thousands of companies it takes to build a car. That makes us less competitive in a global economy with nations whose tax costs are rebated at their border.

We are exporting the costs of our taxation, regulation and social welfare and the world isn't buying!

Additionally, our tax code has driven 2 to 3 trillion dollars into the underground economy and drives over 20 trillion into offshore financial centers. That money would like to be in our banks and markets, and while it ultimately does reach the U.S. thanks to deposits being turned into loans, the economic waste involved is massive.

All of those issues, the compliance costs, the embedded costs, the underground economy and the offshore money would be fixed by moving from an income tax to a consumption tax. None will be fixed by nibbling around the edges of our current system.

And while they are nibbling around the edges, I shall wait breathlessly to see if any reform includes adding to the tax rolls the 47 percent currently not paying income taxes.

Hatch's stated aim for revenue neutrality is a genuflection to politics, not economics. The only economic consideration must be current value of future growth. By eliminating a tax on productivity we will create future growth, and thus future revenues, that will more than make up for current deficits. The FairTax would result in economic growth that we haven't seen since the mid to late 1980's.

If they choose to keep their eye on politics they might note that consumption was far more stable than income over the last decade and had we been under the FairTax our revenues would have been higher.

As for Hatch's wish for permanence, he will be forced to do something bold and I do not see it in his first principles. Future Congresses simply won't care what you say or do. They will know better. The Reagan reform of 1986 has been amended over 20,000 times. Absent a constitutional amendment his will be too.

The one way to limit future Congresses is to repeal the 16thAmendment and all taxes on income. The only avenue left will be consumption taxes and the equal protection clause will prevent picking winners and losers so that future changes in the code tax will impact everyone equally and political pressure will come to bear.

The FairTax repeals all taxes on income and taxes personal consumption of new goods and services. The current code taxes the average earner about 23 percent of what is earned. Payroll tax - eight percent; income tax - 15 percent. Under the FairTax you will be taxed 23 percent of what you spend. Money saved, invested, gifted or willed to heirs is not taxed.

The FairTax abolishes the IRS. This once seemed to be a quaint notion, but is no longer. The IRS is an organized criminal enterprise masquerading as a government agency. It needs to be put away.

The FairTax gives to all Americans the most important gift a free society has to offer - anonymity. No agency of government should know more about us than we are willing to tell our children.