Citizens for an Alternative Tax System
(CATS)

"My goal is to tear the income tax system out by the roots,
and leave it on the side of the road."
-- Rep. Bill Archer, Chairman,
House Ways and Means Committee

Solutions - Alternatives To The Income Tax

Even Washington politicians, of all stripes, are finally talking about tax reform -- and some of the forward-thinking ones have even sponsored legislation to do something about it. The question that now faces us is this -- will we settle for just a little tinkering? Will we let the politicians preserve their ability to give away special interest favors? Or are we going to demand comprehensive reform, and insist on the best system for America?

Here are the some of the alternatives that have been proposed:

Flat Tax

Currently many Americans pay as much as 33% or more in cumulative taxes because tax rates vary for each individual based on income brackets, exemptions and a complex system of IRS codes. Flat Tax proponents would create a single flat rate tax fixed at 17% that would be the same rate for all Americans. Most Americans would see this as a reduction in tax rate from the current national average of 22%. House majority leader Dick Armey is proposing the 17% flat tax on income. This is basically the same plan supported by former candidate Steve Forbes.

Do not be deluded by those who propose a Flat Tax, for this is still an an Income Tax. While less complex than the current income tax, there will still be deductions, allowances, loopholes, the IRS, and Tax Court. The main beneficiaries will be the rich, who will see their tax rate reduced.

Value-Added Tax (VAT)

A Value Added Tax (VAT) is similar to a sales tax, however, instead of implementing one tax of a certain percentage at the time of retail sale, there is a smaller tax, proposed at 5%, added each time the product is resold or when value has been added. For example a tax is added when a product is passed from a manufacturer to a wholesaler, and again from the wholesaler to the retailer. Most products would be priced higher than they are today because the cost of goods would include this built in tax. The VAT proposal is sponsored by Representative Sam Gibbons of Florida and Senator Ernest Hollings of South Carolina.

This is a much better option than a Flat-Rate Income Tax. In particular, no tax forms or tax returns will be needed for individuals, and it would eliminate the need for the IRS. The main drawback of the VAT is that it is complicated to administer and collect. The cost of compliance is estimated at nearly $5 billion per year (which is still about a hundred times less than the current Income Tax).

National Retail Sales Tax (NRST)

A National Retail Sales Tax (NRST) wipes the whole mess clean by eliminating all income, inheritance, gift, and capital gains taxes. The NRST starts fresh with a flat 15% rate on all retail consumer purchases. This 15% rate would be collected by the sates alongside the state sales tax, thus eliminating the IRS. The 15% rate has been carefully calculated to raise the same amount of revenue as our current system. No tax is levied on charitable donations, education or training, home mortgage interest, or savings or investment.

The NRST is by far the best of the tax alternatives:

A Progressive Sales Tax

Your first reaction might be sticker shock -- how the heck could I afford to pay 15% more for everything? Actually your real tax burden goes down. Firstly, remember that you will finally see your paycheck with zero income tax withheld (only payroll taxes). This is an instant pay raise! Then you get a rebate (adjusted for your number of dependents) equal to what you spend up to the poverty level.

The NRST is a progressive tax because this rebate to all Social Security cardholders reimburses everyone for all NRST paid up to the poverty level. Besides shielding the poor (and everyone else) from tax up to the poverty level, this turns the 15% flat rate into a progressive tax (the more you spend, the higher the tax rate). If you made and spent exactly the poverty level, ($18,588 for a family of four) you would pay 15% in tax equal to $2,788, and receive a rebate of $2,788, for a net of ZERO taxes. The same family of four with $40,000 in income -- if they spent every last nickel on retail consumption -- would pay $6,000 in sales taxes. After a rebate of $2,788, net taxes would be $3,212, which works out to an effective rate of 8%! The wealthy would pay a rate of 8% to 15% -- a small rebate versus tens of thousands of dollars of spending doesn't significantly affect the 15% rate.

The frugal, who save proportionately more, will pay more moderate rates and be justly rewarded for postponing consumption, and helping grow our economy with savings and investment. And, of course even the frugal, when they finally do spend their wealth (or after they give it away) the wealth will be taxed.

But the rebate is icing on the cake -- even if there was NO rebate you'd still come out ahead. Think about it -- would you rather pay 15% to 30% of everything you earn in federal income tax, or 15% of everything you spend in federal sales tax? Unless you're spending more than you earn, 15% of your spending is a lower tax bill. (And remember interest on home mortgage payments isn't taxed, neither is education or training, neither is savings or investment.) The vast majority of people will pay less tax, even though the same amount of revenue is raised because:

  1. finally, everyone is paying their fair share and,
  2. most importantly, the incredible waste and inefficiency of administering, enforcing, and litigating the collection of the income tax is gone.

No special interest loopholes, less tax cheating, no incentive to hide money offshore, no free ride for imports. But it gets even better, because...

Consumer Prices Will Go Down

When you take the cost of business income taxes and income tax compliance out of the cost of doing business, prices will go down. Companies do not cut their profits to pay all their income taxes and income tax compliance costs, but rather pass these costs to us by building them into their prices, just as any other cost of doing business. Reducing these costs will drive prices down and offset much of the 15% NRST. Ah, but, you don't trust free market competition to drive prices down? Well, ask computer manufacturers why they cut their prices every year -- just because their costs went down. They'll tell you they had to avoid losing market share.

We all know there's no such thing as a free lunch. The reason this reform is so painless is that our current system is so incredibly wasteful that the cost savings pay for much of the new tax! Right now we're ultimately paying up to $300 billion in compliance costs, plus all of the business income taxes that are built into consumer prices. $228 billion in compliance costs works out to over $2,000 for every individual taxpayer -- not even counting the hidden tax you pay in prices for the actual corporate income tax itself!

Lower prices includes the cost of money -- the interest which makes your mortgage payment so large. Right now tax-free municipal bonds pay two full percentage points less in interest versus regular bonds on which the interest is taxed. When all savings and investment are tax-free all interest rates will drop in a similar fashion -- including refinancing on your home mortgage. What would 2% off the interest rate do for your monthly mortgage payment?

Lower prices will help American businesses get more competitive and hire more workers. Lower prices will help the poor who spend almost all of their income on necessities, poor people who, right now, don't get a rebate for all the corporate income taxes and compliance costs hidden in the price of goods. But the biggest dollar benefit will go to you, the average consumer in this country who has been paying THREE sets of taxes, your income tax, business income taxes, and $2,000 worth of business costs to complying with the income tax. The NRST eliminates three unfair taxes and replaces them with one FAIR tax.

The NRST is Scrupulously Fair

The poor are protected and everyone pays their fair share in exact proportion to what they spend/consume over the poverty level. Everyone pays the same rate on all retail purchases -- no more special interest exemptions. Perhaps this will even rekindle the traditional American spirit of 'we're all in this together'. Politicians will have a hard time creating exemptions for special interests with a two-thirds supermajority needed to create exemptions. And if they try, it will be out in the open -- not buried in 20,000+ pages of regulations.

Think about the political implications for a minute. No income tax for politicians to sell loopholes to special interests. This will go a long way to cleaning up all the corrupt money in politics. The bottom line is unarguable -- what could be fairer than protecting the poor 100%, and then everyone contributing to government in exact proportion to what they get from society in consumption?

It is fair because it is easy to understand, obey, and enforce. The sales taxes charged by 45 states can be dovetailed with the NRST -- and states are given a financial incentive to harmonize their tax base (not an unfunded mandate). The NRST is simple and clear-cut to enforce. Just as importantly, it's much easier to track 20 million retail businesses than 150 million independent individual/corporate taxpayers. In California the state sales tax collects 90% of its' revenue from 8% of the retailers -- and there are only 1 million of these big retailers nationwide. Tax evasion will be that much more difficult, and enforcement that much easier.

It's even fair to the retailers who have to tweak their state sales tax system to collect the NRST as well. Retailers will receive .5% of all collections as a reimbursement for their time and trouble -- no more unpaid burden to comply with an impossible income tax system. If you were a retailer, would you rather continue your current income tax hassles, or once a month multiply your sales by 15%?

It is fair because the IRS and their flagrant abuse of civil liberties and common sense will finally be eliminated. Never again will you have to fear an audit, or dread the annual paperwork nightmare of April 15th.

The NRST Will Raise Our Standard of Living

...and create good-paying jobs. Getting rid of $228 billion in compliance costs will be an immediate boost of over $2,000 per year for each individual taxpayer. Administration costs of the NRST are minuscule compared to the income tax system, or even a VAT. But even more importantly, people and businesses will keep 100% of the income they earn. This creates a huge incentive to save, invest, produce and grow. Harvard economist Dale Jorgenson testified to the House Ways and Means Committee that we would see an initial 13% increase in our Gross Domestic Product. and a 9% long range increase. While these figures may duly quantify economic costs and investment inputs, they can't hope to quantify the unleashing of the American entrepreneurial spirit, no longer tied down by a hideously complicated and punitive income tax system.

Rep. Bill Archer, Chairman of the House Ways and Means committee cites a recent survey of major corporations in Europe and Japan. They were asked "If the US abolished its income tax and went to a sales tax, would that have any impact on your decisions?" 80% said they would build factories in the US; 20% said they would move their international headquarters to the U.S. To paraphrase Ross Perot -- the giant sucking sound you hear is investment, growth and jobs flowing into the United States of America. An interesting question is -- if this is the reaction of foreign firms, how fast will American entrepreneurs expand?

Jobs, Jobs, Jobs

Besides triggering an investment, productivity, and job growth boom, NRST creates a level playing field for imports and our exports. No longer will exports pay both U.S. income taxes here, and foreign consumption taxes abroad. No longer will most imports largely avoid contributing to the cost of our government. Exports are tax-free in the U.S., and imports sold here will pay tax, just like any other product sold in America. The NRST creates a level playing field (GATT and NAFTA-legal) and will result in a cost swing of 20% to 30% in favor of American products and American workers. No income tax proposal, flat or otherwise, can ever do anything for American companies and workers in this regard.

The NRST is Simple and Visible

...on everyones' sales receipt, every time they buy something. Whether you would like to see more or less federal spending and taxation, at least now we would all know what we're paying, and can talk rationally about it. Most importantly we would all know that the burden of extra taxes (or the savings from reduced taxes) will be shared fairly by all.

Imagine Never Filling Out an IRS Form, Ever Again!

Imagine a world where you actually receive 100% of your paycheck (less payroll taxes), plus your rebate. Imagine saving and investing tax-free. How easy would it be to build a retirement, put your kids through college, or even become financially independent while you're still young enough to enjoy it? Wouldn't you like to live, and work, and invest, in an economy running in overdrive from an investment boom? What would that do for your retirement? For your children and grandchildren?

The Bottom Line

...is, unless you've been living in the underground economy, you won't see your taxes go up, and will probably see them go down significantly. The NRST will be a tax cut for the vast majority of taxpayers who have played by the rules. A tax cut that pays for itself. It's not magic -- the same amount of revenue is raised. But it is a tax cut for honest taxpayers, as loopholes are closed, special interest tax avoidance eliminated, and illegal cheating reduced. Plus imports will start to contribute their fair share. When the tax base is broadened for all to pay their fair share, while waste and inefficiency are eliminated from the collection process, most people's taxes will go down.

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