[Congressional Record Volume 143, Number 4 (Tuesday, January 21, 1997)]
[Senate]
[Pages S564-S565]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




      SENATE RESOLUTION 16--RELATIVE TO ABOLISHING THE INCOME TAX

  Mr. LUGAR submitted the following resolution; which was referred to 
the Committee on Finance:

                               S. Res. 16

       Whereas the savings level in the United States has steadily 
     declined over the past twenty-five years, and lagged behind 
     our industrialized trading partners;
       Whereas our economy cannot achieve strong, sustained growth 
     without adequate levels of savings to fuel productive 
     activity;
       Whereas the income tax, the accompanying capital gains tax, 
     and the estate & gift tax discourage savings and investment;
       Whereas the methods necessary to enforce the income tax 
     infringe on the privacy of our citizens and divert an 
     estimated $157 billion of taxpayer resources to comply with 
     its rules and regulations;
       Whereas the Internal Revenue System estimates that each 
     year it fails to collect 17 percent, or $127 billion, of the 
     income tax owed to the federal government;
       Whereas the income tax system employs a withholding 
     mechanism that limits the transparency of federal taxes;
       Whereas the most effective tax system is one that promotes 
     savings, fairness, simplicity, privacy, border adjustability, 
     and transparency;
       Whereas it is estimated that the replacement of the income 
     tax system with a national sales tax would cause our savings 
     rate to substantially increase;
       Whereas the national sales tax would achieve fairness by 
     employing a single tax rate, taxing the underground economy, 
     and closing loopholes and deductions;
       Whereas the national sales tax would achieve simplicity by 
     eliminating record keeping for most taxpayers and greatly 
     reducing the number of collection points;
       Whereas the national sales tax would be the least intrusive 
     tax system because most taxpayers would not be required to 
     file returns or face audits from the Internal Revenue 
     Service;
       Whereas the national sales tax is border adjustable and 
     would place United States exporting on a level playing field 
     with our foreign competitors;
       Whereas a national sales tax is a transparent tax system 
     that would raise Americans' awareness of the cost of the 
     federal government;
       Whereas a national sales tax would best achieve the goals 
     of an effective tax system: Now, therefore, be it
       Resolved, That it is the sense of the Senate that:
       (1) the income tax system, both personal and corporate, the 
     estate and gift tax, and the accompanying capital gains tax 
     be replaced with a broad-based, single-rate national sales 
     tax on goods and services;
       (2) the national sales tax rate be set at a level that 
     raises an equivalent level of revenue as the income taxes 
     replaced;
       (3) the federal government work with the states to develop 
     a state-based system to administer the national sales tax and 
     that states be adequately compensated for their efforts; and
       (4) the Congress and states work together in an effort to 
     repeal the sixteenth amendment.

  Mr. LUGAR. Mr. President, I am pleased to submit a Senate Resolution 
expressing the sense of the Senate that the income tax system be 
abolished and replaced with a broad-based consumption tax on goods and 
services.
  Despite a booming stock market and several years of economic growth, 
I have found that many citizens--particularly young Americans--are 
anxious about their future and have diminishing hope for better 
economic opportunities.
  Long-term economic trends justify these apprehensions. From 1950 
through 1973, hourly compensation--including both wages and benefits--
increased an average of 3.0 percent per year. Since 1973, the average 
wage increase has been less than one half of one percent. During the 
past two decades, economic growth has been cut in half, averaging only 
2.5 percent annually. If this isn't discouraging enough, limiting 
growth to 2.5 percent appears to be the economic course of the Federal 
Reserve Board.
  Much of this economic under-achievement can be attributed to our 
national savings rate, which has fallen to alarmingly low levels. After 
averaging 13.3 percent in the 1960's, our Nation's savings rate has 
sunk to 5.5 percent in the 1990's. Because of this low rate of savings, 
capital to fuel our economy has become increasingly scarce. As a 
result, productivity gains have averaged just 1.1 percent from 1974 to 
1994. The Concord Coalition estimates that had our productivity held 
its pre-1974 annual growth rate of 2.9 percent, the median family 
income would now be $50,000 annually, instead of the current level of 
$35,000.
  Although several other factors have contributed to this slowing of 
savings and prosperity, including continuing Federal budget deficits 
and the ensuing debt, our income tax system remains a significant drag 
on our long-term economic expansion. I propose that Congress should 
work toward the elimination of the income tax, the accompanying capital 
gains tax, and the estate and gift tax and replace them with a broad-
based, single-rate national sales tax on goods and services.
  The Federal income tax system is inherently flawed. By taxing savings 
and investment at least twice, it has become the biggest impediment to 
economic growth in the country. Each year it costs Americans more than 
5 billion hours of time to comply with it. That is equal to the total 
worker output of my State of Indiana. It is unfair and riddled with 
loopholes. It has been changed 31 times in the past 41 years. And 
finally, it doesn't work. By its own admission, the Internal Revenue 
Service fails to collect from nearly 10 million taxpayers, with an 
estimated $127 billion in uncollected taxes annually. Anything this 
broken should be ended decisively.
  One can evaluate a tax system using several criteria. It must be: (1) 
simple, (2) the least intrusive, (3) fair, (4) transparent, (5) border 
adjustable, and (6) friendly to savings and investment. I have studied 
recent tax reform proposals with these six factors in mind. Many are 
better than the current income tax. But if we are going to overhaul our 
tax system, we should choose the one that meets these criteria. I have 
concluded that a national sales tax is the best alternative.
  The first factor in choosing an effective tax system is its 
simplicity. Under a national sales tax, the burden of complying with 
the income tax code would be lifted. There would be no records to keep 
or audits to fear. The money a person made would be his or her own. You 
may decide if you want to save it, invest it, or give it to your 
children. It is only when you buy something that you pay a tax.
  The national sales tax is the least intrusive of the tax proposals. 
The IRS would be substantially dismantled. The IRS would no longer look 
over the shoulders of every taxpayer. Americans would not waste time 
and effort worrying about record keeping, deductions, or exemptions 
that are part of the current tax code.
  The national sales tax is the fairest. Everyone pays the tax 
including criminals, illegal aliens, and others who currently avoid 
taxation. Wealthy Americans with lavish spending habits would pay 
substantial amounts of taxes under the national sales tax. Individuals 
who save and invest their money will pay less. Gone are the loopholes 
and deductions that provide advantages to those with the resources to 
shelter their income.
  The national sales tax would also tax the underground economy. When 
criminals consume the proceeds of their activities, they will pay a 
tax. Foreign tourists and illegal aliens will pay the tax. Tax systems 
that rely on income reporting will never collect any of this potential 
revenue.
  Of course, the fairness test must likewise consider those with 
limited means to pay taxes. Like the income tax system, a national 
sales tax can and should be constructed to lessen the tax burden on 
those individuals with the least ability to pay. One strategy for 
addressing this problem would exempt a threshold level of goods and 
services consumed by each American from the Federal sales tax. Another 
strategy is to exempt items such as housing, food

[[Page S565]]

or medicine. I am committed to designing a tax system that does not 
fall disproportionately on the less fortunate.
  The national sales tax is the most transparent. A Federal tax that is 
evident to everyone would bolster efforts in Congress to achieve 
prudence in Federal spending. There should be no hidden corporate taxes 
that are passed on to consumers or withholding mechanisms that mask the 
amount we pay in taxes. Every year the public and Congress should 
openly debate the tax rate necessary for the Federal Government to meet 
its obligations. If average Americans are paying that rate every day, 
they will make certain that Congress spends public funds wisely.
  American exports would also benefit from the enactment of a national 
sales tax. We must adopt a tax system that encourages exports. Most of 
our trading partners have tax systems that are border adjustable. They 
are able to strip out their tax when exporting their goods. In 
comparison, the income tax is not border adjustable. American goods 
that are sent overseas are taxed twice--once by the income tax and once 
when they reach their destination. In comparison, the national sales 
tax would not be levied on exports. It would place our exports on a 
level playing field with those of our trading partners.
  But the last and most imperative reason for replacing the income tax 
with a national sales tax is that it would energize our economy by 
encouraging savings. For the first time in the modern era, the next 
generation of Americans may be economically worse off than the previous 
one. Despite robust economic growth over the past several years, the 
average income of families has declined. They feel trapped in a box 
with diminishing hope of escaping.
  The bottom line is that as a nation, we do not save enough. Savings 
are vital because they are the source of all investment and 
productivity gains--savings supply the capital for buying a new 
machine, developing a new product or service, or employing an extra 
worker.
  The Japanese save at a rate nine times greater than Americans and the 
Germans save five times as much as we do. Today, many believe that 
Americans inherently consume beyond their means and cannot save enough 
for the future. Few realize that before World War II, before the income 
tax system developed into its present form, Americans saved a larger 
portion of their earnings than the Japanese.
  A national sales tax would reverse this trend by directly taxing 
consumption and leaving savings and investment untaxed. Economists 
agree that a broad-based consumption tax would increase our savings 
rate substantially. Economist Laurence Kotlikoff of Boston University 
estimates that our savings rate would more than triple in the first 
year. Economist Dale Jorgenson of Harvard University has concluded that 
the United States would have experienced one trillion dollars in 
additional economic growth if it had adopted a consumption tax like the 
national sales tax in 1986 instead of the current system.
  As I have outlined here today, I believe the national sales tax is 
the best tax system to replace the income tax. If we enact a tax system 
that encourages investment and savings, billions of dollars of 
investment will flow into our country. This makes sense--America has 
the most stable political system, the best infrastructure, a highly 
educated workforce and the largest consumer market in the world. Our 
economic growth and prosperity would be unsurpassed. I am committed to 
bringing this message of hope to all Americans, and I look forward to 
working with my colleagues on advancing this important endeavor.

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