A consumption-based tax would reach the underground economy.
By U.S. Representative Bill Archer
An Agenda for the Next Century
As the year 2000 draws near, we must develop an agenda for the next century. We must rethink the way government does its job – and be willing to investigate bold changes to those things which are incompatible with the new reality of the U.S. in a global marketplace.
In today’s world, our nation’s income tax has become a liability. I believe that the time has come to tear the income tax out by its roots and implement a whole new way of raising federal revenues.
In the Ways and Means Committee hearings, we have begun the process of developing a new design of federal taxation which would meet these goals:
- Truly achieve simplicity and remove the I.R.S. from our lives as much as possible;
- Tax the “underground” economy;
- Allow for maximum savings;
- Advance our competitiveness overseas.
I am convinced that these goals can only be met by a broad-based form of consumption tax, an example of which is a general sales tax.
Make Taxes Simple, Remove the I.R.S.
Complying with the I.R.S. is a huge drain on our national economy. It takes me two days to do my return. Nationwide, individual taxpayers spend an estimated 1.8 billion hours complying with the tax code, and businesses spend about 3.6 billion hours. Taxpayers who have their returns prepared for them spend all together about $65 billion a year — and businesses spend more still.
Imagine if all that time and money were productively spent!
By taxing consumption, we could remove the I.R.S. almost completely from our lives. Even the simplified “flat” income tax that some reformers favor would still require that every taxpayer send their name and income to the I.R.S. and be subject to audit.
Tax the Underground Economy
Many people in America don’t pay any taxes at all. The “underground economy” is the name given to the many men and women whose incomes are unreported and therefore untaxed. Some are drug dealers. Others are illegal aliens. Many are providers of services who get payment in cash, and many others have simply fallen through the cracks.
The Treasury reports that the underground economy accounts for anywhere from $100 billion to $200 billion each year in uncollected tax revenues. Honest taxpayers are tapped to make up the difference.
A consumption-based tax would reach the underground economy. Every time a drug dealer bought a car or every time a house painter bought a can of paint, they would be paying their fair share of the cost of our government.
A flat tax, by contrast, would not get at the underground economy. Because it is an income tax, it is reasonable to expect that the same income that is unreported now would continue to be unreported — and the difference would continue to come out of your paycheck.
Allow for Maximum Savings
But in addition to lowering taxes, a consumption tax would greatly favor savings. Almost every economist will tell you that one of the single greatest financial crises facing this country is its lack of savings. Under my proposal, only consumption would be taxed. Any dollar a taxpayer saved would not be taxed at all. Houses and other capital assets, since they aren’t consumed items, would also escape taxation. Our economy would become a great sponge for job-creating capital investments from all over the world.
Advance Our Competitiveness Overseas
In the future, it is my hope that conflicts between nations will be resolved not on the battlefields, but in the international marketplace. It is vital that we position the U.S. to be the world’s economic superpower.
Right now, our income tax hurts the competitiveness of our products. To pay it, our companies have to increase the prices of the products they sell overseas. A consumption tax would avoid this problem altogether, decreasing the prices of our products overseas.
At the same time, foreign products that are consumed in the United States would be taxed. That would contribute to our cost of government, and make our products more competitive at home.
If we moved to a consumption-based tax, we would gain an immense competitive advantage perfectly acceptable under international trade rules. The rest of the world would be scrambling to catch up. A flat income tax would not have these benefits.
We can and must minimize problems associated with the consumption tax. For instance, we must develop a way to insure that low-income earners will not be adversely affected. But you can be sure: I intend to do all I can to pursue these changes and make America as strong as it can be — today, tomorrow and in the 21st century.
Bill Archer represents the 7th District of Texas in the United States House of Representatives and is Chairman of the House Ways and Means Committee. The Georgia Public Policy Foundation is a nonpartisan, member-supported research and education organization based in Atlanta, Georgia, that promotes free enterprise, limited government and individual responsibility.
Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.
© Georgia Public Policy Foundation (July, 1995). Permission is hereby given to reprint this article, with appropriate credit given.
By U.S. Representative Bill Archer
An Agenda for the Next Century
As the year 2000 draws near, we must develop an agenda for the next century. We must rethink the way government does its job – and be willing to investigate bold changes to those things which are incompatible with the new reality of the U.S. in a global marketplace.
In today’s world, our nation’s income tax has become a liability. I believe that the time has come to tear the income tax out by its roots and implement a whole new way of raising federal revenues.
In the Ways and Means Committee hearings, we have begun the process of developing a new design of federal taxation which would meet these goals:
- Truly achieve simplicity and remove the I.R.S. from our lives as much as possible;
- Tax the “underground” economy;
- Allow for maximum savings;
- Advance our competitiveness overseas.
I am convinced that these goals can only be met by a broad-based form of consumption tax, an example of which is a general sales tax.
Make Taxes Simple, Remove the I.R.S.
Complying with the I.R.S. is a huge drain on our national economy. It takes me two days to do my return. Nationwide, individual taxpayers spend an estimated 1.8 billion hours complying with the tax code, and businesses spend about 3.6 billion hours. Taxpayers who have their returns prepared for them spend all together about $65 billion a year — and businesses spend more still.
Imagine if all that time and money were productively spent!
By taxing consumption, we could remove the I.R.S. almost completely from our lives. Even the simplified “flat” income tax that some reformers favor would still require that every taxpayer send their name and income to the I.R.S. and be subject to audit.
Tax the Underground Economy
Many people in America don’t pay any taxes at all. The “underground economy” is the name given to the many men and women whose incomes are unreported and therefore untaxed. Some are drug dealers. Others are illegal aliens. Many are providers of services who get payment in cash, and many others have simply fallen through the cracks.
The Treasury reports that the underground economy accounts for anywhere from $100 billion to $200 billion each year in uncollected tax revenues. Honest taxpayers are tapped to make up the difference.
A consumption-based tax would reach the underground economy. Every time a drug dealer bought a car or every time a house painter bought a can of paint, they would be paying their fair share of the cost of our government.
A flat tax, by contrast, would not get at the underground economy. Because it is an income tax, it is reasonable to expect that the same income that is unreported now would continue to be unreported — and the difference would continue to come out of your paycheck.
Allow for Maximum Savings
But in addition to lowering taxes, a consumption tax would greatly favor savings. Almost every economist will tell you that one of the single greatest financial crises facing this country is its lack of savings. Under my proposal, only consumption would be taxed. Any dollar a taxpayer saved would not be taxed at all. Houses and other capital assets, since they aren’t consumed items, would also escape taxation. Our economy would become a great sponge for job-creating capital investments from all over the world.
Advance Our Competitiveness Overseas
In the future, it is my hope that conflicts between nations will be resolved not on the battlefields, but in the international marketplace. It is vital that we position the U.S. to be the world’s economic superpower.
Right now, our income tax hurts the competitiveness of our products. To pay it, our companies have to increase the prices of the products they sell overseas. A consumption tax would avoid this problem altogether, decreasing the prices of our products overseas.
At the same time, foreign products that are consumed in the United States would be taxed. That would contribute to our cost of government, and make our products more competitive at home.
If we moved to a consumption-based tax, we would gain an immense competitive advantage perfectly acceptable under international trade rules. The rest of the world would be scrambling to catch up. A flat income tax would not have these benefits.
We can and must minimize problems associated with the consumption tax. For instance, we must develop a way to insure that low-income earners will not be adversely affected. But you can be sure: I intend to do all I can to pursue these changes and make America as strong as it can be — today, tomorrow and in the 21st century.
Bill Archer represents the 7th District of Texas in the United States House of Representatives and is Chairman of the House Ways and Means Committee. The Georgia Public Policy Foundation is a nonpartisan, member-supported research and education organization based in Atlanta, Georgia, that promotes free enterprise, limited government and individual responsibility.
Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.
© Georgia Public Policy Foundation (July, 1995). Permission is hereby given to reprint this article, with appropriate credit given.
