WASHINGTON – The IRS and all payroll taxes should be scrapped and replaced with a national sales tax (search) that would require the poor to pay nothing, some tax reform advocates are proposing as an ideal plan to rejigger the U.S. tax code.
The proposal has been gathering strength among leading lawmakers, and the issue has made its way into the presidential campaign and at least one key Senate race.
Rep. John Linder (search), R-Ga., has been promoting a national sales tax for years. He said he is gaining more and more allies on Capitol Hill, including members of the Republican leadership.
Linder, a six-term representative, dismisses the central criticism of a national sales tax — that it would disproportionately tax the poor — by saying they would be exempted. But critics say Linder's plan is a little too neat, that his math does not add up and that it would be impossible to exempt the poor and still avoid having a behemoth agency like the IRS.
"It's not worth the tremendous pain that it would cause for a questionable promise of success in the long run," said Adam Kovacevich, communications director for Inez Tenenbaum (search), the Democratic candidate for Senate in South Carolina who is facing a national sales tax advocate, Republican Rep. Jim DeMint (search).
"This is the kind of idea that sounds great at the Heritage Foundation, but when you actually apply it to South Carolina, it would cause serious pain in the state," Kovacevich said, referring to the conservative think tank in Washington, D.C.
Under Linder's plan, the national sales tax would be set at 23 percent, which he claims would be enough to replace the funds that the canceled payroll tax would have raised. The national sales tax would be in addition to the average 6.2 percent state sales tax that people already pay.
Linder said low-income Americans would benefit the most because they would receive a rebate or "prebate" for the new 23 percent sales tax. Linder's plan would abolish the IRS, creating in essence, he said, a $3 trillion to $5 trillion tax cut. The states would then be responsible for distributing these funds.
Spending up to the poverty level, a figure determined by the Department of Health and Human Services (search), would be tax-free for all households. Households would receive a "prebate" on the first day of the month for all spending expected during the month.
In 2004, HHS estimated the poverty level (search) for a single person to be $9,310. For a family of four it was $18,850. Linder said "prebates" would result in a huge increase in purchasing power at the bottom end.
Critics of Linder's plan say "prebates" would complicate the supposedly streamlined plan, and make it impossible to get rid of the Internal Revenue Service.
"One of the reasons Linder and others have been supportive is because you can get rid of the IRS, but if you start doing rebates, who's going to be responsible for that? The simplicity starts to evaporate, so then what's the point?" asked Paul Weinstein, chief operating officer of the Progressive Policy Institute (search).
Linder responded that under his plan, prebates would be administered by the states. He acknowledged, however, that some additional bureaucracy would be necessary, but nothing on the scale of the IRS.
Under his bill, the Fair Tax Act of 2003 (search), Linder said that not only would the tax burden actually be less regressive, but America would benefit by creating a more competitive market with the elimination of corporate payroll taxes. America would be "ferociously competitive in world markets."
"We'd become the world's biggest tax haven and foreign capital would be in our markets. We also know that virtually every international corporation located elsewhere would build their plants in the U.S. for the same reason."
Linder's measure has 54 cosponsors, and he said he believes it is gathering support on Capitol Hill and across the country. The bill has the support of House Majority Leader Tom DeLay, R-Texas, and Linder predicted that another powerful ally would soon start lobbying President Bush.
"I fully expect him to hear from [Speaker of the House] Denny Hastert on this," Linder said.
In Hastert's book "Speaker: Lessons From Forty Years in Coaching and Politics," which was published in August, he called for replacing the current income tax system with either a national sales tax or a "flat" income tax.
Responding to a question at a Florida campaign rally last month, Bush sounded open to discussion of a national sales tax.
"I'm not exactly sure how big the national sales tax is going to have to be, but it's kind of an interesting idea that we ought to explore seriously," the president said. The next day administration officials said Bush was not considering such a reform.
John Kerry's campaign quickly condemned a national sales tax, and Bush for potentially supporting it.
“If [Bush] has his way, every trip to the supermarket will feel like a visit to H&R Block and every day will be April 15. And now that this plan has been exposed, George W. Bush is trying to mislead the public into thinking it was just an off-the-cuff comment," Kerry spokesman Phil Singer said in an Aug. 12 statement.
Linder said he is unsure how the proposal would be received in the administration.
"There is a battle going on in the administration between those who think he should jump into this and those who are afraid of big ideas," he said.
But while some think the system sounds good, critics dispute Linder's expected tax rate of 23 percent. William Gale, an economic expert at the Brookings Institution (search), estimated that to replace the income tax, the sales tax rate would have to be more than 26 percent. Other economists place the number at 40 or 50 percent.
Adding to this chorus, Weinstein suggested that 30 to 36 percent would be more realistic, and said he worried about the effect of a national sales tax on consumer activity.
"A considerably high tax may dampen consumption. Quite frankly we got out of the last recession through consumer spending," he said.
The debate is not only taking place in Washington. The idea of a national sales tax has emerged as a major issue in the race between Tenenbaum and DeMint. The two candidates have written dueling op-eds in South Carolina's leading newspaper The State, and debated the issue last Friday.
"Helping our companies and workers drop the enormous burden of our tax code is a vital first step," DeMint wrote in his Aug. 22 op-ed.
Back in Washington, retiring Rep. Billy Tauzin, R-La., has also proposed legislation abolishing the IRS and replacing it with a national sales tax. Tauzin's bill, the Individual Tax Freedom Act of 2004 (search), was introduced in April and has three cosponsors. It was referred to the Committee on Ways and Means in April, but no action has been taken on it since then.
Linder said he hoped to have a hearing on his bill in the Ways and Means Committee this month, but one has not been scheduled yet. He acknowledged that any action before the election is unlikely, but with powerful lawmakers like DeLay and Hastert interested in the topic, the debate will certainly continue on Capitol Hill.