Senators Plan Push To End Income Tax

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The New York Sun

WASHINGTON – Disappointed by the recommendations of President Bush’s advisory panel on tax reform, Senator DeMint, a Republican of South Carolina, will introduce legislation this week that would replace America’s tax code with a simpler, free-market alternative that would abolish personal and corporate income taxes in favor of a flat-rate levy on retail and business transactions.


The DeMint plan, likely to be put before the Senate on Wednesday, is the culmination of years of work by the former congressman, who successfully moved to the Senate from the House last year largely on the strength of his campaigning for tax reform. Mr. DeMint’s co-sponsor will be his fellow South Carolina Republican, Senator Lindsey Graham.


Mr. DeMint told The New York Sun yesterday that he has decided to bring his proposal before the Senate as a response to the president’s tax-reform panel, headed by a former Republican senator of Florida, Connie Mack, and a former Democratic senator of Louisiana, John Breaux.


The Mack-Breaux commission last week unveiled two proposals for restructuring the tax system that, while eliminating several elements of the current tax code seen as unnecessarily complicated and unjust by free-market advocates, failed to please many reform-minded economists.


Mr. DeMint described the advisory panel’s work as “not the real reform we need.”


“With the panel endorsing small changes,” Mr. DeMint added, “I felt it necessary to get my plan for comprehensive reform out as quickly as possible.”


Under Mr. DeMint’s plan, all personal income taxes and the attendant bevy of related taxes, deductions, and exemptions, including the estate tax and the alternative minimum tax, would be abolished. Americans would no longer have to file income tax returns, according to a staffer familiar with the legislation.


Instead, individuals would pay an 8.5% federal retail sales tax on all new goods and services. Corporate income taxes would be replaced by an 8.5% business transfer tax charged during purchases of supplies or equipment, according to the staffer.


The result, according to an economist with the Heritage Foundation who scored the DeMint proposal, Gary Robbins, is a code that distributes the tax burden more equitably among individuals and businesses and that eliminates the competitive disadvantage American companies face abroad. An economist at the Cato Institute, Christopher Edwards, cited as an example businesses based in Eastern Europe, which, he said, is experiencing a “flat-tax revolution.”


Although the DeMint plan would harm certain sectors privileged by the current code, such as the home mortgage industry, eliminating taxes on investment would provide a net benefit to the American economy by protecting its “seed corn,” Mr. Edwards said. According to Mr. Robbins, every dollar invested generates an additional 80 cents’ worth of annual revenue for the American economy in perpetuity by creating more jobs and more tax revenue.


Mr. Robbins, a former chief of the applied econometrics division at the Treasury Department, said the DeMint proposal would probably stimulate the American economy to grow by 10% to 15%. The 8.5% rate, Senate staffers said, had been decided upon after a thorough vetting by Mr. Robbins and other economists to ensure that the proposal would remain revenue-neutral.


The proposal will generate the same amount annually for federal coffers despite a provision in the legislation that, according to Mr. DeMint, “protects the poor.”


According to Senate staffers, Mr. DeMint’s proposal would provide every American living below the federal poverty level with a rebate for 8.5% of poverty-level income – which, for a family of four, is about $19,000 a year. Because providing an 8.5% rebate on a person’s entire income in a consumption-based tax system assumes that the individual consumed all of his income, the provision encourages saving among low-income Americans, Senate staffers said.


The plan also encourages saving with “individual development accounts,” the staffers said. Those earning up to twice the poverty level are eligible to invest in the accounts, and individual contributions of up to $500 will be matched by the federal government to encourage setting aside resources for “first-time home-buying, starting a business, retirement, or education,” staffers said.


The DeMint proposal is not without its deficiencies, economists said. By collecting taxes through the business sector, Mr. Robbins said, “It will be easier for people to cheat,” because individuals are less tempted to exploit loopholes or file fraudulent returns than businesses. Still, he said, the number of returns processed by the government under the DeMint plan will be reduced to 20 million from about 120 million, thus making enforcement easier.


One of the political benefits of the DeMint plan, economists noted yesterday, is that it is a “hybrid” proposal. Suggestions for replacing the tax code with a flat tax on income has drawn significant criticism and opposition on Capitol Hill, and switching to solely a national retail sales tax would require a rate of nearly 30% to keep the tax system revenue-neutral. Analysts said such a steep rate would scare many Americans. The combination of the two, and the lower 8.5% rate, analysts said, is thus less likely to draw intense opposition.


The White House said last week that overhauling the tax system will be a priority next year, and tax analysts have said they expect President Bush to next address the issue seriously during his State of the Union address in January.


“There is a growing urgency and consensus that the tax code is killing our ability to compete in the global economy,” Mr. DeMint said. “It’s as if we have huge signs on our beaches saying, ‘Take Your Business Somewhere Else!'”


“Tax reform,” the senator added, “has never been more relevant.”


The New York Sun

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