[Congressional Record Volume 141, Number 93 (Thursday, June 8, 1995)]
[House]
[Pages H5740-H5741]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                 ALTERNATIVES TO OUR CURRENT TAX SYSTEM

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from Michigan [Mr. Smith] is recognized for 5 minutes.
  Mr. SMITH of Michigan. Mr. Speaker, I rise to discuss the need to 
change the tax system.
  Mr. Speaker, James Madison, one of the architects of the 
Constitution, once warned that we must keep our laws simple. Our 
freedom is in danger, he explained, when laws become so complicated 
that no one knows what they mean and change so often that no one can 
predict what they will be in the future.
  Our Tax Code in the United States provides an example of what happens 
when we ignore Madison's warning. Today, thanks to the bold leadership 
of Chairman Bill Archer, we can now discuss fundamental changes in our 
Tax Code, including even the elimination of the income tax.
  As a former chairman of the Senate Finance Committee in Michigan, I 
had the opportunity to deal with several alternatives to our current 
tax system. Among these alternatives was a consumption tax, a sales tax 
with our industrial processing exemption, and a flat-rate income tax. I 
would like to simply make a few comments about our experience in 
Michigan.
  Michigan is the only State in the Nation with a consumption tax. We 
call it the single business tax. It has been in effect since 1975. A 
couple of points that come from this experience are, first of all, if a 
consumption tax is adopted at the national level, it must include a 
deduction for capital acquisition. That is full expensing of the cost 
of machinery and buildings. Michigan's capital acquisition deduction 
has been the most successful element of our consumption task. It 
increases productivity and encourages business and job expansion.
  Second, the tax base should be determined using a subtractive method 
of calculation. Michigan uses the additive method to get the value 
added, and it has given us some problems. While it is going to yield 
the same base as the subtractive method, it has created a great deal of 
confusion among businesses. The tax is viewed as our income tax by many 
businesses and results in such questions as why can not I deduct wages? 
Why do I have to pay a tax even though I do not have profit? These 
types of questions would be eliminated if the tax was calculated using 
the so-called subtractive method.
  Third, the primary problem with a consumption tax is that the tax is 
hidden in the final price of the product. This creates a danger that 
the government can raise the rate without individual taxpayers being 
aware of it. This is what has happened oftentimes in Europe. However, 
our experience in Michigan has been that since the business tax rate 
has not been increased since 1976, it has not been a problem. In 
[[Page H5741]] fact, it was recently reduced by a small amount.
  One major problem with a sales tax is that it tends to become a 
turnover tax. It is important that only the final sales are taxed. For 
example, we should not tax the sale of rubber sold to Goodyear Tire, 
for example, and then tax the full value of the tires when they are 
again sold. This fundamental concept is clear in theory, but there are 
numerous difficulties in actual implementation that we have pretty much 
solved in our Michigan system. The problem with services is especially 
severe.
  Finally, the flat rate income tax has some important advantages. It 
is simple, it has the same economic effect as the ideal consumption or 
sales tax, and the taxpayer, if withholding is eliminated, will be very 
knowledgeable about the rate.
  There are two negatives with a flat tax, as I see it. First, it would 
not allow the repeal of the 16th amendment and dismantling of the 
Internal Revenue Department, and thus special interests could again 
come and complicate the existing Tax Code.
  Second, there are problems with the tax treatment of U.S. exports. 
While the economic effect of the Armey flat tax is identical to a 
value-added tax, GATT may preclude us from removing a flat tax on our 
exports while governments using a VAT could remove the tax on their 
exports.
  In summary, each alternative to the current income tax system has 
strengths and weaknesses, but each method is far superior to our 
current invasive system that we have today. In ``The Wealth of 
Nations,'' Adam Smith spoke against the income tax, saying the 
necessary invasion of privacy to enforce tax would be too much for 
citizens to bear. Today his words ring true, and we must move forward 
with this opportunity to replace the current tax system.

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