The following is a Hearing Advisory from the Ways and Means Committee Press Office.
FOR IMMEDIATE RELEASE July 19, 2011
Jim Billimoria, Michelle Dimarob or Sarah Swinehart (202) 226-4774
Congressman Dave Camp (R-MI), Chairman of the Committee on Ways and Means, today announced that the Committee will hold a hearing on alternative tax systems, with a focus on tax systems that are based on taxing consumption rather than income. Specifically, the Committee will consider the FairTax – a proposal to replace existing federal taxes with a national retail sales tax – and the Value-Added Tax (VAT), a type of consumption tax used by many other countries as a supplement to other taxes, such as taxes on individual and corporate income. The hearing will take place on Tuesday, July 26, 2011, in Room 1100 of the Longworth House Office Building, beginning at 10:00 A.M.
In announcing this hearing, Chairman Camp said, “While the Committee thus far has focused on reforming the income tax, tax proposals that would move us away from an income base and instead adopt consumption as the tax base have continued to generate interest as well. Supporters of such approaches believe that taxing consumption rather than income could have important economic benefits, and so as part of our efforts to reform the tax code, the Committee needs to examine those proposals. This hearing will allow the Committee to learn more about two of the most-discussed consumption tax proposals, the FairTax and the VAT.”
BACKGROUND:
For several consecutive Congresses, legislation to repeal existing federal taxes on income, payroll, estates and gifts and replace them with a single national retail sales tax has been introduced as the Fair Tax Act. The bill would grant states the primary authority for the collection of sales tax revenues and the remittance of such revenues to the Treasury. It also would abolish the Internal Revenue Service after fiscal year 2015, replacing it with a Sales Tax Bureau to administer the FairTax and an Excise Tax Bureau to administer remaining excise taxes formerly under the jurisdiction of the IRS. In the 112th Congress, the Fair Tax Act has been introduced as H.R. 25.
Many countries have adopted a different kind of consumption tax – the Value-Added Tax – in addition to their income and other taxes. Under a VAT, a business pays tax on the value it adds during its stage in the production, distribution, and sales processes. Generally, “value added” is measured as the difference between the price for which a business sells a good or service and the cost of the inputs the business incurred to produce it. Economically, however, a VAT is considered equivalent to a retail sales tax, in that the VAT paid at each stage of the process is passed on to the ultimate consumer in the form of a higher retail price.
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This is a long overdue hearing. Among the “economic benefits” of a consumption tax is a major rebalancing of trade. America suffers self-inflicted damage by shunning a border-adjustable consumption tax. Currently, almost all our imports arrive at US ports free of any consumption tax since the exporting country has rebated its tax and we choose not to apply any tax of our own. Conversely, when we offer goods and services for export, the buyer has to buy his own country’s consumption tax on top of all the US taxes embedded in the offer price. Small wonder we have incurred a rising trade deficit as more and more countries have adopted a national sales tax or a value-added tax. Hats off to them! They have a clear idea of their national interest, while Americans continue to ignore the single most potent reason for our chronic trade deficits.
I am very hopeful that the country will move towards a consumption based tax system. I would prefer to see a VAT combined with a progressive income tax for incomes making above a certain amount.
There is no need to tax income at any level - the FAIR TAX is a truly progressive tax by taxing consumption so that the ‘luxuries’ purchased by the ‘wealthy’ will be taxed. The more money you spend (and that includes all money not just income) the more tax you will pay.
Seems fair to me.
Any border-adjustable consumption tax would provide powerful incentives to save, consume domestically-made goods, and export, thereby reducing our foreign indebtedness without a collapse of the dollar. There are, however, two important issues with the FAIR tax (including the abolition of income taxes that is part of the original proposal and that Jerry likes): 1) as savings and investment and the returns on them would go completely untaxed, the concentration of wealth in the hands of already well-off individuals and corporations will escalate; and 2) any retail sales tax can easily be evaded. The second problem should not be minimized: simply do your business on a cash basis and the government will be unable to monitor compliance. Without nearly universal compliance, honest taxpayers are played for suckers by the unscrupulous ones, and the government can become an accomplice in this rip-off. Better to adopt a value-added tax that creates a paper trail as taxes are collected and paid at each stage.