[Congressional Record Volume 150, Number 114 (Tuesday, September 21, 2004)]
[House]
[Pages H7323-H7326]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                         BIG TROUBLE LIES AHEAD

  The SPEAKER pro tempore (Mr. McCotter). Under the Speaker's announced 
policy of January 7, 2003, the gentleman from Michigan (Mr. Smith) is 
recognized for half the time until midnight or approximately 43 
minutes.
  Mr. SMITH of Michigan. Mr. Speaker, I think it was in The Music Man 
where the seller of that musical equipment says, ``We have big trouble 
right here in River City.'' We have big troubles here in Washington, 
D.C., and in America, for a couple of reasons.
  The competition from other countries as they try to copy our 
techniques of production means that the competition is greater than it 
has ever been. Our future generations are going to be much more 
challenged than we have been. Actually, the baby boomers are a 
generation that is going to start retiring in the next 4 or 5 years; 73 
million baby boomers will start retiring, probably the richest retirees 
that this country has ever had, probably the richest retirees this 
country will ever have.
  We have some challenges in Washington as politicians tend to solve 
more and more problems, saying, somehow it must be Washington's 
responsibility rather than the individual's responsibility to solve 
some of these problems. What we have done is ended up, for example, 
with a tax system where now, today, 50 percent of the adults in the 
United States only pay about 1 percent of the income tax. So, of 
course, there is a lot of that 50 percent who are suggesting that maybe 
government should solve more of their problems because they do not have 
a stake in it.
  The flat tax or the consumption tax, the sales tax are some 
suggestions that say, everybody has to have a stake in

[[Page H7324]]

the way this country operates and the services that Federal Government 
provides.
  This first chart shows some of the problems of over-promising. What 
the economists with the green eye shades call unfunded liabilities 
means the amount of today's dollars that would have to be put in a 
savings account drawing interest that equals inflation and the time, 
value of money to come up with the dollars necessary to pay for these 
programs, over the next 75 years in this case.

                              {time}  2320

  If we add up Medicare, part A Medicare; part B Medicare; part D, the 
drug program; and Social Security, it comes to $73.5 trillion, 
according to Dr. Saving, who is the trustee for both Social Security 
and Medicare, $73 trillion that would have to be put in a savings 
account today to earn the revenues in addition to the money coming in 
from the FICA tax, the payroll tax, to accommodate today's promises. A 
huge challenge for this government to try to develop the kind of 
discipline of stopping the overpromising and, for that matter, stopping 
the overspending. If we add the unfunded liabilities to the debt, the 
$7 trillion debt that we have today, added to the $73 trillion in 
unfunded liabilities, it means that it is almost insolvable without 
dramatic cuts in benefits or drastic increases in taxes.
  If we do not make some changes, what we see happening in other 
countries can very well happen in the United States. And that means, 
Mr. Speaker, take a guess, and I ask my audience to take a guess of 
what the payroll tax is in France to accommodate their senior 
population. It is over 50 percent. The payroll tax in Germany to 
accommodate their senior population has just gone over 40 percent. Of 
course, that makes them much less competitive. And I am just 
suggesting, Mr. Speaker, let us not let that happen in the United 
States by continuing the tendency, the political tendency, because the 
more we overpromise, traditionally the likelier we are to get a few 
more votes and get elected to Congress, and if the people that elect us 
to Congress want somebody there who is going to spend more, promise 
more, borrow more, tax more, then that is the kind of government we are 
going to end up having.
  Let me just briefly go through this chart of unfunded liabilities. 
Medicare part A, which is mostly to hospitals, is estimated to have an 
unfunded liability of $21.8 trillion. Medicare part B that doctors 
charge, mostly doctors, is $23.2 trillion. Medicare part D, the new 
prescription drug bill that we passed recently, adds another $16.6 
trillion unfunded liability to the cost of Medicare. Social Security is 
just at 11.9, $12 trillion unfunded liability for Social Security. That 
is more than a quarter of a million dollars of unfunded liabilities for 
every man, woman, and child in America.
  How do we shout long enough, hard enough, aggressive enough to get 
the Congress to pay attention? I think probably the secret is that 
Americans have to start paying attention to what is happening in their 
United States Congress, what is happening in their State legislatures, 
what is happening with their counties as governments at all levels are 
called on to solve more and more of the problems of individuals.
  Let us take a look at the fact that we are going to have a strong 
economy. I mean, regardless of what we do and the solutions to Medicare 
and Social Security and stopping the overspending and trying to balance 
the budget, and, by the way, hopefully in the next several weeks we are 
going to take up the Balanced Budget Amendment that will add a little 
more pressure to us to stop our overspending, regardless of what we do, 
if we do not have a strong economy in America, we are not going to make 
it. We are going to start going downhill relative to other countries.
  The interest on the debt is now over $300 billion a year, and the 
interest rate is continuing to climb. In fact, we are still at a very 
low interest rate; but it is still using up 14 percent of the total 
Federal budget, and that is growing rapidly for two reasons: interest 
rates are going up and our propensity to overspend because people do 
not like taxes, borrowing is sort of putting off the tax increase for a 
later time, and usually what we are talking about is a later 
generation.
  So we continue to overpromise, overspend, and overborrow. And what 
that means is a tremendous obligation to future generations, not only 
coming up with the promises, overpromises, and the unfunded 
liabilities, but coming up with the additional amount of the budget 
that is sucked up paying the interest on their debt.
  I would suggest that if we are going to have a strong economy, we 
have got to change our tax system. Our tax system in the United States 
puts our businesses at a competitive disadvantage. It discourages 
savings and investment, and that is why I have introduced H.R. 3060, 
which is a flat tax that ends up taxing at the rate of 17 percent. 
After the deduction, it taxes at 17 percent across the board. So, 
number one, everybody has a stake. Number two, it puts our businesses 
in a more competitive position with other countries in terms of the 
selling of our product.
  Let me talk about our current Tax Code: 7,000 Tax Code changes have 
been made just since 1986, 74 percent increase in the tax rules since 
1986, and they are growing every day. Taxpayers spend 6.1 billion 
hours, 6.1 billion hours, preparing their tax returns, 8 billion pages 
of returns every year, and it is becoming more complicated. So people, 
individuals, taxpayers, do not totally understand how the tax system 
works. I have heard young people say, Well, I am looking forward to tax 
day because government sends me a check. But the fact is they have been 
taking money away from them on every paycheck, and so the government 
owes them much more money than they are getting back.
  Government estimates of tax compliance costs reach $183 billion every 
year. Compliance costs approach 20 percent of the total income tax 
revenue. Extremely complicated, difficult, takes a lot of time. 
Businesses adjust their business decisions to lower their income tax 
often more than the commonsense, logical, market-based decisions they 
would otherwise make, which makes them more inefficient in terms of 
being competitive.
  I thought it would be fun to just review the total pages of Federal 
tax rules. As lobbyists and special interest groups come in to lobby 
Members of the House and Members of the Senate and lobby the White 
House, they are interested in having special provisions in our 
complicated tax system that are going to benefit their particular 
clients. And what this has resulted in is more and more complications, 
more and more rules, and more and more pages of tax returns that if one 
is going to understand the system, they have to hire an accountant that 
is going to spend full time almost on the tax policy.
  In 1913, we had very few rules and very few taxes. In 1945, we 
approached 10,000 pages. By 1984, we approached 30,000 pages. Now we 
have about 50,000 pages of Federal tax rules that go into detail 
explaining the laws that this Congress has passed often to benefit some 
particular interest group.
  Just briefly on the flat tax, the flat tax bill I have introduced 
starts at 19 percent for the first year and then drops to 14 percent 
the second year and thereon. It is a 17 percent flat rate after the 
deduction. The deduction is $36,600 for a family of four. So they do 
not pay any tax on the first $36,600 if they are a family of four; 
25,000 if they are a couple. It ends the double taxation on savings, 
ends the double taxation on dividends and capital gains. That means 
there is going to be a greater incentive to invest and to save. And 
that is what makes our economy and our productivity grow: the savings 
investment is the seed corn of the research and development that 
develops the kind of research and technology that result in better 
products produced more efficiently.

                              {time}  2330

  That is what is going to keep us competitive.
  Just as a footnote, I would urge every parent to encourage their kids 
to make a special effort in science and math. Science and math 
achievement in the United States is one of the lowest in the world, and 
probably as technology becomes more an integral part of how we develop 
more efficient ways to produce products and actually the development of 
those products, students that have a good background in science

[[Page H7325]]

and math are going to be the ones that are going to find it most easy 
to get a good-paying job.
  I think I am down to the fact that it allows individuals to file 
their returns on a simple postcard form. I printed up that postcard 
form of what I see as the kind of tax form that is going to make 
taxpaying very simple and very easy. It increases confidence that 
everyone pays their fair share.
  The flat tax is pro-growth. It is pro-freedom. I think most people in 
America are sick and tired of the rhetoric that says, well, we are 
going to make some adjustments here and there. They would like to get 
rid of the IRS. They would like to have the kind of tax system that 
encourages them to work and to produce and to save and invest.
  Look, when we started this country, that is how our forefathers wrote 
the Constitution. They said in effect those that work hard, that study, 
that use that knowledge, that save and invest and try, end up better 
off than those that do not.
  Of course, what we have done in the last 30 or 40 years is we have 
tended to divide the wealth and take away from those that are 
successful and give it to those that are less successful. In so doing, 
we have taken away some of the incentive that has made this country 
great, and that is the rewards for achievement and the rewards for 
trying and saving and hard work.
  This is the flat tax postcard form. You put down your wages and your 
salary and your pensions. The personal allowance is $25,580 for married 
filing jointly, $12,790 for a single, $16,330 for a single head of 
household. Number of dependents on the next line. Line 4 is the 
personal allowance. Multiply $5,510 by each dependent.
  What you have left after you subtract those deductions from wages, 
salary and pension is what you pay your 17 percent tax on. If you paid 
ahead of time, you subtract the taxes that you have already paid and 
figure out what government now owes you or what you owe the government.
  We are having a lot of debate. Everybody agrees that we should change 
our complicated Tax Code because of its preferences that have been 
built in over the years to special interest lobbyists, because of its 
complication, and because it discourages effort and it discourages 
learning and it discourages savings.
  Should we have a flat tax or sales tax? On the flat tax or sales tax, 
let me suggest that they both have the same type of tax base and they 
accomplish the same kind of results as far as encouraging business 
expansion, good jobs, a fair way to tax.
  However, the tax base of a true national sales tax and a flat tax in 
the fashion of Dick Armey's or Steve Forbes' proposal will be the same. 
The tax base of a true national sales tax and a flat tax are going to 
be the same. In both cases, the tax is on consumption and not on 
investment, which is a superior tax for economic growth that is going 
to benefit our competitive position with other countries and certainly 
benefit the general public.
  The question then really is on which tax is going to be 
administratively most feasible, and the flat tax is the winner hands 
down. At least 20 years ago, two economists, Hall and Rabushka, laid 
out the case for the flat tax in detail. The second edition of their 
book on the flat tax in the mid-1990s is called The Flat Tax. In the 
book they make it clear why the tax base of a national sales tax and 
the flat tax are the same.
  What I am trying to point out, Mr. Speaker, is both the flat tax and 
the sales tax have the same tax base. They both accomplish the same 
goals. So now we are trying to decide which one is more possible to 
replace this complicated Tax Code that we have now. Let me give you a 
little intuition on why both of these taxes are essentially both the 
same.
  The tax base of a flat tax is income, but people only do two things 
with income. They either spend it or they save it. Since there is no 
tax on savings, this means the flat tax is on consumption. But this is 
the same as a sales tax.
  Let me try to be a little more technical. I started trying to work 
out an alternative to Michigan's sales tax as a flat tax when I was 
chairman of the senate finance committee back in Michigan. Under the 
national sales tax, business is taxed on its sales minus what it 
purchases from other firms minus what it pays on investment and 
capital. That is on the sales tax.
  On the flat tax, individuals pay taxes only on their wage income and 
not on the income from savings, such as interest or dividends. Business 
actually pays the taxes on savings, interest and dividend, because they 
are not allowed to deduct it. Businesses pays taxes on its sales minus 
what it buys from other firms minus investment in capital minus wages.
  Now, between the business income tax and the individual income tax, 
what is taxed then is sales minus what business buys from other firms 
minus what it pays on investment and capital. So the two tax bases are 
the same.
  Now, when it comes to administration, the flat tax is much simpler. 
The individual and business both fill out a short form and it is clear 
what is going to be taxed.
  Under the sales tax, lots of things will be difficult to determine. 
First, there is going to be political pressure, as there is in every 
State that has a sales tax, not to have that sales tax on such things 
as food and prescription drugs, not to tax medical services or dental 
costs. As was the case in Michigan and in most every other state that 
has a sales tax, we have done this. As this happens and you reduce what 
is going to be taxed on food, prescription drugs, health benefits, 
services, what that means is the tax rate for the sales tax is going to 
go up.
  For example, to raise the revenue that is equivalent to our 17 
percent flat tax is going to require a sales tax that is much higher. 
In initial calculations it could be as high as a 28 percent sales tax. 
If it is a 28 percent sales tax, this is certainly going to lead to all 
sorts of incentives to hide sales, which will be easier to do than to 
hide income, and this will lead to an even higher sales tax. You can 
call them free riders or whatever you want.
  But I would suggest in the sales tax effort to get rid of the IRS, in 
its place what we are going to do is have a new Federal police force 
examining what is produced so we can determine how much production is 
being avoided on paying the sales tax. Where you tend to say that 
individuals consuming are paying the sales tax, what we have done in 
Michigan and most other states that charge a sales tax, to simplify it, 
we say well, you can add the tax if you want to, but who is responsible 
for the sales tax are the businesses that are selling the product.
  Let me just briefly show the difference in what an individual 
taxpayer ends up with that earns money and decides to save the money.
  First, under the current system, for example, let us say after you 
have your income, after you spend what you are going to spend, you are 
fortunate enough and diligent enough that you save $10,000, and then 
you end up paying 28 percent tax on the $7,200, now on $7,200, so what 
you have left, out of what you have saved and minus your tax, what you 
have left is $7,200. Let us say the interest rate, or your returns on 
investment are maybe around 6 percent; that means I think that that 
money would double in about 10 years. So after 10 years, that $7,200 
that you have left after taxes doubles to $14,000. And then what do we 
do under the current system? We tax you on the interest rate you 
earned. So if you tax on the interest on the $7,200, as the money 
doubles, you end up having $12,384.
  With the flat tax that encourages savings because we do not tax 
savings, after expenses, you end up with $10,000, you pay the 17 
percent, and that leaves you $8,300. In 10 years, it doubles to 
$16,600, but we do not have any tax on that increased earnings of the 
dividends or interest, so that leaves you with a net of $16,600. So the 
point that I am trying to make is you are much better off and it 
encourages savings and investment, which is key to the kind of 
discoveries that we can have for businesses to be more competitive in a 
world market.
  I think a problem with the sales tax is determining what is a final 
retail sale. In trying to change our sales tax in Michigan to take in 
some services, the overwhelming problem is what is the final retail 
sale that you charge a sales tax on? For example, say I am an 
accountant and I do your books, I am going to charge you a sales tax on 
it as the final user. But what if I am the same accountant, but I am 
doing the

[[Page H7326]]

books for a local retail store, and that retail store is going to take 
the increased cost that they pay for that bookkeeper and add it to the 
price of their product; the sales tax is going on the price of their 
product, so you do not charge sales tax when you are an accountant 
doing work for a firm or a retailer that can pass that tax on in a 
product that is going to be taxed on the sales tax. It is complicated. 
It is complicated, figuring out what you are going to tax sales tax on.
  Because of the fact that the advocates of the fair tax and the sales 
tax suggest that we want to change the 16th Amendment to the 
Constitution, a political complication of talking this chamber into 
having a two-thirds vote that is going to change the Constitution, and 
then after that, you have to have three-quarters of the States agree to 
ratify what has been suggested as a constitutional change.
  Pretend for a moment that you are back in that State legislature, and 
here is the Federal Government saying, look, we want to change the 
system to get rid of the income tax and have a sales tax. We would sort 
of like you as the State to collect that money for us, for the Federal 
Government because, look, you are going to have a sales tax anyway in 
your State because you cannot copy the Federal income tax any more 
because we are going to have a sales tax, but we would also like you to 
collect the sales tax for the Federal Government, State legislatures 
and governor. We also are suggesting that you have this sales tax that 
we are going to pass into law and that it be on services and drugs, 
that it be on medical supplies. It is going to be a tough getting 
three-quarters of those States to ratify the Constitution with that 
kind of threat that they are going to have to be the instigators of 
that sales tax in their State.
  I think what is likely is that all of the problems of a sales tax, 
how it is going to be administered, what do you calculate as the final 
sale that is going to be taxed for the sales tax, and the complicated 
effort of convincing States that they have to be a part of this effort 
to now expand their sales tax and maybe even start collecting it for 
the Federal Government.
  A third problem has to do with purchases, for example, over the 
Internet. You might make purchases from another country over the 
Internet, and that is more and more available. How are these going to 
be taxed? What is likely is that they will not be and, thus, U.S. 
retailers will be at a disadvantage compared to foreign retailers. I 
think these are just a few of the problems in implementing a national 
retail sales tax.
  The fact that no State has successfully managed to put in place a 
true retail sales tax that captures all final goods and services should 
tell us that it will be very difficult to do at the national level 
also.
  Okay, back again, reviewing. Implementation, the flat tax is just 
going to be a bill passed by a majority and signed by the President. 
The sales tax, it is the bill, plus the constitutional amendment. The 
burden on States on the flat tax: none. On a sales tax, the States must 
collect the Federal taxes, often new ones on services; and for those 
States that do not have a sales tax, implementing that kind of a tax 
structure in those States.
  The burden on the taxpayer. We have seen the simple form for a flat 
tax. On the sales tax, there is no form for individuals, but it is 
going to end up with much more business monitoring to know how much is 
being produced to determine what is being avoided in the sales tax, and 
the risk of tax evasion. The risk of tax evasion with a flat tax is the 
same as the current tax system. But with a sales tax, the high tax on 
goods increases the incentives for invasion. It increases the 
incentives to trade with your neighbor instead of paying a very high 
sales tax that I have estimated will go to 28 percent, maybe even 
higher.
  In conclusion, let me just suggest that getting back to our 
predicament of over-spending, over-promising, the challenges that we 
face with medicare and Social Security, the challenges we face with 
paying our veterans' benefits, the challenges we face coming up with 
retirement benefits for Federal employees, means that we need to make 
the kind of changes in government that is going to help make sure that 
this country stays on the cutting edge of competition in the new 
challenging world market. And one of the tools that we can use to do 
this is getting rid of the IRS, getting rid of the complicated Tax Code 
that has preferences based on the strength of PACs and lobbyists that 
have influenced this and the other chamber and the White House over the 
last 50 years, and come up with a tax system that is going to be better 
for individuals, it is going to be better for the long-term competition 
that future generations are going to face.

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