Congressional Record, Volume 150 Issue 116 (Thursday, September 23, 2004)

[Congressional Record Volume 150, Number 116 (Thursday, September 23, 2004)]
[House]
[Pages H7556-H7563]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

THE FAIR TAX

The SPEAKER pro tempore. Under the Speaker's announced policy of
January 7, 2003, the gentleman from Georgia (Mr. Linder) is recognized
for 60 minutes as the designee of the majority leader.
Mr. LINDER. Mr. Speaker, in the last 5 or 6 weeks, a bill that I
introduced, H.R. 25, the FAIR Tax, has been getting a great deal of
interest in the national press, part of it because the Speaker
mentioned it in the book he recently published, and part because the
President took a look at it just prior to the Republican convention.
A lot of it is because the last 2 days the Democrats have taken a
keen interest in it and have found unusual forums in which to trash it,
including a 27-page critique that the House Minority leader put out
today. I will say some of those criticisms are interesting, and some
are even true.
But, in any case, what they failed to do in the 27 pages was to
discuss the problems we are facing precisely because of our current
system. They can spend all the rest of the next year or two defending
the current IRS system, saying it is a good system, and ignoring the
problems, but we cannot ignore them much longer.
Americans spend between 6 and 7 billion man-hours each year just
filling out IRS forms. We spend that much time calculating the tax
implications of a business decision. We lose 18 percent of our economy
to making tax decisions instead of economic decisions.
The current director of the Congressional Budget Office informally in
a conversation told me he believes we spend upwards of $400 to $500
billion a year to comply with the Code and remit $2 trillion. This is
hardly an efficient way to raise taxes.
Studies show that it costs the average small business $724 to
collect, comply with the Code and remit $100 to the Federal Government.
And who pays all those compliance costs? Who pays all those payroll
taxes that get embedded into the costs of goods at retail? Who pays the
income taxes?
It is not the business. There simply is not a mechanism for a
business to pay a bill other than through price, and our customers pay
them all. In fact, the only taxpayer in the world is a consumer, who
finally consumes the product and all the embedded costs, we have it.
The study we had commissioned out of at Harvard 5 or 6 years ago
argues that 22 percent of what we spend at retail represents the
imbedded cost to the IRS. Anybody who is working and spending 100
percent of the income to live is losing 22 percent of their purchasing
power to the current system.
But it also causes us to ship goods and services into a global
economy with a 22 percent tax component in the price system, making us
less and less competitive in a world economy and causing jobs to move
overseas, where the embedded tax component in the price system is
considerably less, particularly in those nations that have a value-
added tax that is rebated at the borders.
We also drive offshore, because of our Tax Code, capital. There is
today 5 to $6 trillion in overseas accounts because it is cheaper to
borrow at 6 percent interest than to repatriate dollars at 35 percent
tax. So they are protected overseas, and in some cases, able to be
spent over there. Not to mention wealthy individuals who keep money
offshore to protect it from a confiscatory tax system.
We drive underground elicit activity because of our Tax Code. It is
estimated that pornography, illicit drugs and illegal labor constitute
a $1 trillion economy that is untaxed. Under a consumption economy, if
they wanted to buy something, they would at least pay their fair share
to the government.
The Alternative Minimum Tax was passed in 1969 to ensure that wealthy
people who have no tax liability due to their legal use of deductions
and credits would still have to pay some taxes. In 6 years, 35 million
Americans will be subject to the Alternative Minimum Tax.
We spend over $30 billion a year on Earned Income Tax Credit designed
to rebate to low-income workers the cost of the payroll tax burden, the
tax that pays for Social Security and Medicare. It is estimated that 25
to 30 percent of that is fraud.
Then the big issue, the big issue is Social Security and Medicare.
The current dollar 75-year unfunded liability in Social Security and
Medicare is $51 trillion. Trillion. To put that in perspective, if you
started a business on the day Jesus Christ was born and lost $1 million
a day through yesterday, it would take you another 720 years to lose $1
trillion. We are looking at 75 years of costing us $51 trillion.
How do we solve this? We abolish the income tax and repeal all taxes
on income and get rid of the IRS; get rid of personal and corporate
income taxes, self-employment taxes, capital gains taxes, the gift tax,
the death tax. All would be replaced by a single tax on personal
consumption.
Yes, we would get rid of the payroll tax. It was said on the floor
yesterday that our bill did not deal with the payroll tax. I would be
willing to have these debates, but I want to have them with people who
have read the bill, because the bill is the only one that has ever been
introduced that totally abolishes the payroll tax, and the payroll tax
is the highest tax that 75 percent of America pays.
If you would get rid of the IRS and get rid of all tax on income and
let competition drive the tax component out of the tax system and
replace it with a one-time, single consumption tax, out of every dollar
you spend on personal use, 23 cents goes to the government, the rest
stays with the merchant, we would fund the government at the current
level, but everybody would keep, get to keep their whole check and
become a voluntary taxpayer.
Now, that number has been criticized as being rather high. I will
repeat you are currently paying 22 cents, but just do not know it. But
today, if you earn $1, 36 cents goes to the government and 64 cents is
left to spend. Would you not rather pay 23 cents out of every dollar
you spend, rather than 36 cents out of every dollar you earn?
But, more importantly, the FAIR Tax is fair because it contains a
rebate for every household in America which would totally rebate the
tax consequences of spending up to the poverty line.
Currently people who spend all of their income lose 22 percent of the
purchasing power to the embedded cost. Under our system, that rebate
would totally untax them up to the poverty line. Poverty level
spending, by definition, is that necessary for a given size household
to buy their essentials. For my mother, it is $9,500 year. For a family
of four, it is about $25,000. For a family of six, it is $30,000. Their
spending in a year up to that amount would be totally untaxed, plus
they would not pay the embedded costs. It would be gone.
The FAIR Tax is a volunteer system. Every citizen becomes a voluntary
taxpayer, paying as much as they choose, when they choose, on how they
choose to spend. And I mentioned before that it would drive that 22
cents out of the system.
The FAIR Tax is border neutral. Under the FAIR Tax, imports to our
shores when bought at retail for personal use would be taxed at exactly
the same level as our domestic competition, something that has never
happened before.
Lastly, it would solve our Social Security and Medicare problem. In
the Democrat's report, 27 pages today, they have a study that said
Medicare would run out of money in 8 or 9 years instead of 10 or 15
years under my system. I do not know how they could come up with that,
because today Medicare is funded by the workers, 138.5 million people
working to pay for Medicare for all the retirees.
We are going to increase the number of retirees in the next 30 years
by 100 percent. We are going to increase the number of workers by 15
percent. I do not know how you can sustain that system.
Our system, the tax on consumption, would increase the number of
payers from 138.5 million workers to about 300 million citizens every
time something

[[Page H7557]]

was purchased and 40 million visitors to our shores. We would nearly
triple the number of people paying in, and, indeed, we would double the
revenues to Social Security and Medicare in just 15 years by doubling
the size of the economy. That is an estimate of many economists who
have looked at this. And the FAIR Tax would raise somewhere around $200
billion a year from the underground economy.
Beyond these arguments, what will this new paradigm do for our
economy? First of all, we have $400 or $500 billion dollars saved every
year from compliance costs. That would be less moneys we would have to
pay at consumption.
The money saved on compliance costs would be put to an efficient and
profitable use and create jobs. Our gross domestic product would
increase by $180 billion per year because we no longer would have to
make tax decisions.
Eliminating the income tax would bring down long-term tax rates by 30
percent, and with no tax on capital or labor, and this is key, with no
tax on capital or labor, nobody could compete with us in a world
economy. We would be selling goods and services in a global economy
with a zero tax component in our price system, and to compete with us,
every foreign-owned corporation would have to build its next plant in
America.
An informal study quoted several times by the former chairman of the
Ways and Means, Bill Archer, said that a study done of about 400 or 500
European and Japanese firms, they were asked what would you do in terms
of your long-term planning if the United States abolished all taxes on
capital and labor and taxed only personal consumption? Eighty percent
said they would build their next plant in the United States. In fact,
we do know that Daimler-Chrysler wanted to be Chrysler-Daimler and
wanted to be in New York City.

{time} 2145

They are in Stuttgart, because of the tax system. Deficits spooked
the markets; our markets are down because of deficits. Instead of a 20
percent decline in revenues over the last 3 years or last 4 years, had
we been on our system, we would have increased revenues in 14 of the
last 15 quarters. Add this to a huge increase in capital investment,
making workers more productive and giving them larger take-home pay.
We are going to hear a lot on this bill over the next several years,
and I believe it will pass because of the economic forces that are
coming to bear. I urge my colleagues to read the bill. It is 132 pages,
replacing 55,000 pages of statute and regulation. It is not all that
complicated. Sooner or later, those who are criticizing might even pick
it up and take a look at it. I will enjoy the debate.
Mr. Speaker, I yield to the gentleman from Minnesota (Mr. Gutknecht).
Mr. GUTKNECHT. Mr. Speaker, I want to thank the gentleman from
Georgia for having this Special Order, and I want to thank him for his
leadership on this issue.
I wonder if he would step back to podium, because I am not sure if my
colleagues who have been listening in their offices really understand
what we are talking about tonight. The gentleman is talking about
getting rid of the income tax system as we have it in America today.
Mr. LINDER. Mr. Speaker, I want a system where nobody in the
government knows how much you make or how you make it or how you spend
it. I want a system that funds us at the current level, consistently,
but does not keep track of us and will give you the privilege of
anonymity in a free society.
Mr. GUTKNECHT. So the gentleman thinks that the Federal Government
should not know at least as much as my spouse how much I give to
charity. That is none of the government's business.
Mr. LINDER. That is correct.
Mr. GUTKNECHT. And the gentleman thinks that what I do for a living
and how I make my money is none of the government's business.
Mr. LINDER. That is correct.
Mr. GUTKNECHT. The gentleman thinks that I ought to be taxed based on
how I spend my money rather than whether I want to save it, invest it
or spend it on different things.
Mr. LINDER. Whatever you choose to do, it is your money. You made it,
and you spend it, and you can spend it anonymously without having to go
to the government.
Mr. GUTKNECHT. This is really remarkable. In fact, I think that if
the Founders knew that we had this tax system here in America today,
Mr. Speaker, I think the Founders would be rolling in their graves. The
idea that we have a Federal agency who keeps track of how we spend our
money, who wants to know more; every year, they want to know more about
how we spend our money, where the money comes from, where it goes. In
some respects, it is almost un-American, the system we have today.
I want to talk just a few minutes tonight about all of the
regulations, about all of the rules. I understand there are 90,000
pages of the IRS regulations that every American one way or another has
to comply with. That is just outrageous. And, more importantly, I think
the other issue we want to talk about tonight is how every American
knows somehow, down in their bones, that there is something almost
immoral about a system where we have this enormous amount of
regulation, this enormous amount of bureaucracy, all of these rules and
regulations just to pay our taxes. And I wonder if the gentleman would
talk a little bit about how long it takes the average American just to
fill out their tax forms and then, more importantly, what it means to
business in terms of all of the regulations, the accountants, the
lawyers, the rules and all that goes with it, just so that the average
small businessperson can just simply pay their Federal taxes.
Those are issues that we need to talk about, and ultimately, those
are issues that affect how we live in America and ultimately whether or
not we can compete in a world marketplace.
I wonder if the gentleman would just talk a little bit about all of
those pages of rules and regulations in the IRS codes.
Mr. LINDER. Mr. Speaker, there have been a variety of numbers, I know
it is huge. I got all of the regulations at one time in my office and
stacked them on the floor up to here, and it was huge. However, it is
so complicated that no one understands it. It is correct that, under
the law, you have to abide by it, but it is also correct that nobody
knows what it is.
Money Magazine sent 49 different professional tax preparers the same
economic data from a family and asked them to do the tax return and got
back 49 different tax returns, none of which was correct. If you call
the IRS help line today and ask for help in filling out your own tax
return, over half the answers you get will be incorrect.

Now, the gentleman mentioned our Founding Fathers rolling over. Just
imagine a system where, in 1912 or 1911, they are discussing the income
tax, and somebody says, I have an idea, let us punish people for
working and saving. Let us tax everybody. Let us make sure that nobody
escapes. Let us make sure it is about 36 percent of what they earn.
They would never have made it this far. They would never have gotten
this far and they would have been laughed out of town.
Mr. GUTKNECHT. Mr. Speaker, if I could just say, the Senate has just
informed the House that we have reformed the IRS code. Now, is that not
wonderful? Now, we have reformed or amended the IRS code 6,000 times.
Mr. LINDER. Since 1986.
Mr. GUTKNECHT. Since 1986, and now we are going to do it again. And
every time we talk about reforming the Tax Code, what, in effect, we do
is we make it more complicated.
Now, in some respects, I do have a vested interest, because my
daughter and my son-in-law are both CPAs. So, in some respects, if I
want full employment for my daughter and son-in-law, we want to make
this Tax Code even more complicated. But the interesting thing is when
I talk to them, they say, make the Tax Code simpler. And the truth of
the matter is, the best thing we could do is eliminate the income tax
system all together and make it a consumption tax.
Mr. Speaker, there is an old adage that if you want more of
something, you should subsidize it. If you want less of something, you
should tax it. And what do we do in America? We tax income. We tax
investment. We tax savings. We tax productivity. We tax all the things
we want more of, and yet

[[Page H7558]]

we subsidize consumption, indirectly. What we are really talking about
is something very revolutionary. It is about a whole new concept. It is
about changing the whole paradigm in the way the Federal Government
raises revenue, and saying, wait a second, why do we want to tax the
things we want more of? We ought to tax the things that may, in fact,
drag down our economy.
So this is so important. I want to compliment the gentleman on one
very important thing he said earlier. When the gentleman talks about
manufacturing, and we have all heard, we have heard from our friends on
the left, and we have heard from the media, and we have heard from all
kinds of people that America is not doing as well as it should do
relative to creating more manufacturing jobs here in the United States.
Well, one of the things we have to do is change the Tax Code.
I think the gentleman made the point, and we need to talk about that
a lot, in terms of changing the Tax Code to make it more productive or
more profitable for people to create manufacturing jobs in the United
States. The gentleman talked about, one of the things he mentioned, and
I think a lot of people may have missed this point, and that is that in
every product that we produce here in the United States there is
embedded in that product anywhere from 22 to 30 percent taxes. And one
of the things the gentleman wants to change is to say, that ought to be
taken out. And all of a sudden, everything we produce here in the
United States would be anywhere from 22 to 30 percent less expensive on
the world market. If we did that, it seems to me, if everything we made
in the United States was 22 to 30 percent less expensive on the world
market, it would seem to me we would be very competitive and all of a
sudden, a lot of companies would want to produce those products right
here in the United States.
I wonder if the gentleman could talk about that just for a minute.
Mr. LINDER. Companies are leaving our shores not because they hate
America, not because they are mean-spirited; they are leaving our
shores because they are being driven off. They are being driven off by
the tax system that embeds so much into the price that they cannot
compete in the world market.
So some years ago we had a big debate here about people leaving,
wanting to leave their citizenship here and move to another nation that
had lower tax on the death tax, and half this House thought, well, it
is shameful if they do that, let us get their money before they leave,
and the people said, fix the Tax Code and they will be here. If we
eliminate tax on capital and labor, we will be the world's most
attractive tax haven, and the $6 trillion would quickly rush to our
shores to be invested in our stocks, our bonds, lower interest rates,
create jobs that cost about $100,000 to create one job in this country.
But in addition to the $6 trillion in the dollar market that would
come, how many tens of trillions would come from foreign countries in
our markets because we have the best markets in the world. We have the
most productive workers in the world. They would rather build in
Michigan to service the car industry in Michigan than to build offshore
and have to ship it in. If you get the tax component out of that
system, they would be there in a second, and they have said that.
Mr. GUTKNECHT. Mr. Speaker, let me just come back to that number. The
gentleman said $6 trillion. Now, around this place, we throw around big
numbers, but $6 trillion is a huge number.
Can the gentleman put that in some kind of perspective?
Mr. LINDER. Well, I do not know where the numbers come from. The IRS
admits it is $5 trillion. The people who are in the offshore financial
centers say it is $6 trillion. But we just did some minor research. We
know that the high-tech industry itself in California has about $150
billion offshore. It is too expensive to repatriate. We know that
Pfizer has $59 billion offshore. They sell in the French market for
francs and in the Japanese market for yen and the German market for
marks, and then they convert that into euro dollars and they hold it
offshore. All of that money would be back in our markets creating jobs
and bidding companies. We do not know how much Japanese money is
floating around that would come here, but just imagine what would
happen to our stock markets if all the world's investors could invest
in our stocks with no tax consequences. We have had two money managers,
whose names would be familiar to you, who would say, I do not know what
the market would be at as days pass, but in 2 years, it will have
doubled.
There is no question that we will be the attraction, we will be the
attractors of capital, and when you bring capital in, you create jobs.
And this country needs job creation.
Mr. GUTKNECHT. Mr. Speaker, if I could just say, we have talked about
capital, and we have talked about big business, and we have talked
about investors and manufacturing, but I am told that when we talk
about small business, it is where we really see the benefits. Because I
am told that a small business can pay over $700, if we look at all of
their costs of complying with the current Tax Code, to pay $100 in
taxes.
Mr. LINDER. That is right. So the consumer of that small business not
only pays the $100 plus the payroll tax, it also pays the $724.
Mr. GUTKNECHT. So that cost is over $800 for the Federal Government
to raise $100.
Mr. LINDER. That is correct. This is hardly an efficient way to raise
taxes.
Mr. GUTKNECHT. It is almost unbelievable. If we could get Americans
to just think about this, because we all pay the taxes. I mean Paul
Harvey often says that businesses do not pay taxes; people do. If you
could get people to just think about this, that the system we have
today is so incredibly inefficient that we all pay a lot more just to
collect the revenues that the Federal Government needs.
Now, we all agree that the Federal Government, whether it is for
national security or domestic security or for roads or for prisons and
all of the other things we need, we need some revenue, right?
Mr. LINDER. That is correct.
Mr. GUTKNECHT. And we are not talking about cutting the amount of
revenue to the Federal Government; we are talking about creating that
revenue in a new and more efficient way.
Mr. LINDER. Mr. Speaker, we precisely made the decision in the
drafting of this bill not to fight the battle over increasing or
decreasing revenues; we would lose votes on that issue alone, not to
eliminate all the excise taxes, we would lose 150 votes in this House
just on tobacco; not to reform any programs; we wanted to just change
one paradigm, collecting revenues on income, to another, collecting
revenues on consumption, so that it would be neutral. Let us just admit
that the United States consumers would save tons of money if they just
were voluntary taxpayers and paid taxes when they chose to pay taxes,
and then, later, we will worry about the size of the government.
But I want to tell my colleague one thing about the size of
government if we pass this. Nobody knows how much we spend here. But if
my mother saw every time she bought a loaf of bread how much went to
Federal taxes, she would start showing the interest. We right now have
a huge bias in favor of more government and more taxes because most of
us do not pay the income taxes, but we pay the consumption tax
currently embedded in the goods and services that we buy, and that is
what we have to convince America of. You are already paying this tax.
It is the same tax.

{time} 2200

But how would you like to pay the same taxes and have the same
standard of living, but if you are making $60,000 a year, instead of
taking home $3,800 for your house payment and your groceries, you are
taking home $5,000? You get everything you earned, nothing taken out.
Your net pay and your gross pay are the same.
Mr. GUTKNECHT. This is an idea we think we know about, but we do not
really understand. That is, every time we buy a product, embedded in
the cost of that product are the cost of taxes. We do not think about
that, but it is there nonetheless. If we buy a refrigerator, there is a
certain amount of tax that is included in that. And there have been
some people who have attempted to quantify how much that tax is. And so
if I buy a refrigerator for

[[Page H7559]]

$500, embedded in the cost of that refrigerator may be 22 percent or
more in taxes. More important than that, it is not just the taxes. It
is how much that that company had to pay the auditors, the accountants,
the lawyers and so forth to keep all of those records. So the cost may
well be 30 percent of just taxes.
Now, if you take that many out and you put a 22 percent sales tax on
that item, the net cost of that refrigerator, instead of being $500
might be $490 or something like that number. Will the gentleman talk a
little bit about what the real net cost would be to the average
consumer.
Mr. LINDER. I want to make it clear that the consumption tax about
which we are speaking is not to be treated the same as the State sales
tax which is an exclusive tax on top of what you spend. This is
included in what you spend.
The reason we did it that way, an inclusive tax, is because the tax
we are seeking to replace is inclusive of what you earn. If you were
going to treat this as a State sales tax on top of what you spent it
would be 30 percent. But to compare that with the income tax on top of
what you have left to spend, the current income tax is effectively a 56
percent tax rate. Either one, the sales tax is better.
If you go to the store and buy that $500 refrigerator, that may
include the tax within it, but the price of the refrigerator will have
fallen because the embedded cost would no longer be there.
It is easier for me to do this on something I looked a lot at because
the real estate people talk a lot about this. The real estate people
say, how can I sell homes if I do not get to deduct the mortgage
interest deduction on a home. I say, if you really think that sells
your home, double your interest rate and you will sell twice as many
homes.
The current embedded cost in the home of the current system is 28
percent. Under our system, it would be 23 percent. The home will be
less expensive, the same house. If a person is making $60,000 a year,
he is currently bringing home $3,800 a month to make that house
payment. He will bring home $5,000 a month under this system. But more
importantly because of all the tax complications that come out of the
interest rate system, interest rates will decline by 30 percent. So the
house is less. The take-home pay is more. The payment is less. We think
we will sell lots more houses.
Mr. GUTKNECHT. So on April 15, the average American would say what?
Mr. LINDER. Another nice spring day.
Mr. GUTKNECHT. Another nice spring day in Minnesota or Georgia or
Iowa. That is an amazing thing because many Americans dread the idea of
April 15 coming around. They dread it for a lot of reasons. Not only
the amount of money they have to spend, but they worry they might make
a mistake in filling out all these forms and they may have not added
correctly and they did not do this right or whatever and they did not
go back three spaces and they ignored line 1-A or 15-A or 15-B. All of
this would go away. The average American would not have to worry about
April 15.
Mr. LINDER. They would not have to keep a receipt.
Mr. GUTKNECHT. Would not have to keep a receipt, would not have to
worry how much they paid the dentist, how much they paid the doctor,
how much they gave to their church. All of those things would simply go
away. I know a lot of people, and the gentleman mentioned the Realtors
and they are worried about this because at the end of the day this
would affect whether or not Americans would buy homes and particularly
new homes. But the bottom line is, that new home would, probably on a
net-net basis be less expensive than it is today.
Mr. LINDER. That is correct.
Mr. GUTKNECHT. And we have got to get people to think beyond the
first thing that they see and they say, oh, my gosh, you mean I would
have to pay a 23 percent sales tax on everything I buy?
Well, stop and think about it. What would happen is at every payday
you would get to keep everything you earn.
Mr. LINDER. I can tell the gentleman how much that would be.
Mr. GUTKNECHT. And it would be a real number.
Mr. LINDER. The average income earner pays a 28 percent withholding
tax and 7.65 percent, their share of the payroll tax. Their increase in
take-home pay would be about 55 percent the next day.
Mr. GUTKNECHT. So that average family when they go out to buy a home
would be able to buy more home. And when you take away the cost of all
the accountants and everything that goes with the IRS system today,
that home would actually be less expensive.
Mr. LINDER. That is correct.
Mr. GUTKNECHT. Now, the other argument that we hear sometimes is from
people who buy expensive machinery and, frankly, we have a lot of those
people in my district. They are called farmers. Every so often they go
out and buy a new tractor, and that new tractor today may be $150,000.
They say, oh, my gosh. You mean I am going to have to pay a 22 or 23
percent sales tax on a $150,000 tractor? I cannot afford that.
Mr. LINDER. Let us remind them that no business inputs are taxed. No
tractor will be taxed. No barn will be taxed. Anything used in the
business is tax free. No seeds will be taxed.
I tell the farmers if you buy a tractor to work your land, there is
no tax on it. If you buy a hat to wear on your head, there is. Personal
consumption. No business inputs are taxed whatsoever, so farmers are
universally in favor of this because it also gets rid of the death tax
for them which is a huge issue.
We said on the floor yesterday that agriculture would go to bills.
The important thing is for us to continue to repeat to farmers and
other people who buy equipment that, number one, there is no tax on it,
but, number two, the cost of the equipment will go down 20 to 25
percent. So you will buy the same tractor for far less money, and there
will be no tax on it whatsoever.
Now, one farmer did raise an interesting question for me. If the
value of my equipment declines, how can I borrow as much on it? I said,
well, things change all the time in the farm business, but you can buy
the new one a whole lot less expensive.
Mr. GUTKNECHT. So in other words, a farmer that goes down to buy
another tractor that today is $150,000, embedded in the cost of the
tractor is maybe 22 percent tax or 25 percent tax. So in other words,
if you take that out of the price of that tractor, they are actually
going to buy that tractor for $110,000 and they will pay no tax on it.
Mr. LINDER. That is correct.
Mr. GUTKNECHT. I agree with you. If we can get people to just think
in those terms, all of sudden they are going to be say, well, let us
have this right now. Why have we waited. Why do we have this
unbelievable system that I have to go down to my accountant and I have
to worry about this and I have to worry about that.
All of the sudden we have a very simple system that is only about how
much I really consume. Not how much I spend to produce a product, how
much I spend to produce a crop, how much I invest to produce a new job
or a new business or a new product or whatever. This is consumption.
And if we can get people to talk about consumption taxes, all of the
sudden this whole debate becomes very, very simple. And people say,
well, this makes perfect sense.
We have been joined by my friend from the State of Iowa, and I hope
that the gentleman will jump into this debate and talk a little bit
about what it means to him and more importantly how it affected his
last election and how he became a proponent of this thing.
Mr. KING of Iowa. I appreciate the gentleman yielding to me.
A couple of subject matters do pop to mind on that. One of them is
the politics of this and people say, what are the prospects of getting
this passed? Far greater than they were even 2 or 3 months ago. But the
politics of it back in a district where you have to raise the subject
matter, you have to educate the public, you have to be willing to stand
up for what you believe in and face down the criticism. Some of them
not solid criticism; some of it simply politically motivated.
I ran against a certified public accountant two years ago who should
have had a maximum amount of credibility on finances and economics, and
he came out in favor of the IRS. I came out in favor of eliminating the
IRS. I

[[Page H7560]]

am here. He is not. Sixty-three percent was the margin, and we did not
spend a lot of money to get that done.
The public understood quickly, they learned quickly if you can get
the money you earned in your paycheck every Friday, when you punch that
time clock Monday morning at 8 a.m. or whatever the time is and if the
government no longer is standing there with their hand out, the first
lien on everybody's labor in America, the freedom that comes back from
getting the IRS off their back and the burden, that was I think the
most influential piece of this entire race that went on.
If I could, I would like to address another subject matter, and I do
not know if it has been raised here, as I missed the first 10 minutes
or so of the conversation. It was very interesting to me, I did not
even get up for that reason because I am fascinated to watch both of
you add to this knowledge base that we have on this subject, but my
memory goes back to 1992 when Bill Clinton took office as President of
the United States.
He came to this Congress and he was elected on a failed economy, a
recession, so to speak; and he came to this Congress and he requested a
$30 billion economic incentive plan. Now that $30 billion was to be
borrowed because we were in deficit; and it was going to be spent on
make-work projects, projects where you would hire people to go out into
the streets and do things, pay them a wage, and they would spend that
money. And that would stimulate the economy, $30 billion worth of
borrowed money.
About that same time, 1992, Daniel Pilla published his book, ``Fire
The IRS.'' And in that book I believe the economist he quotes is a
Harvard economist, Dale Jorgenson.
Mr. LINDER. Who, by the way, did a lot of the studies for our bill
Mr. KING of Iowa. On the same analysis. When those numbers were added
up at the cost of the IRS, the cost of funding the IRS, the cost of
enforcing IRS tax law, the cost of paying the people to prepare the
taxes, paying the people to collect the data that you hand to your tax
person, paying yourself $10 an hour to sit up all night on April 14,
which hopefully we will not have very many of those nights again, but
added to that disincentive when people decide that I am not going to
punch that time clock for any more overtime or pick up that phone for
that extra sales call or extend that production line in my plant or my
factory because the tax burden is too high, it is not worth the risk,
it is not worth the work.
You add all those up and that number in Daniel Pilla's book was $700
billion a year, with a B.
Now, $30 billion in Bill Clinton's economic incentive plan of
borrowed money, $700 billion, same year published, Daniel Pilla's book,
when you add in of those disincentives. That does not include what
happens to our economy when we take these several hundreds thousand
people that are working in the regulatory sector of this economy for
the IRS, enforcing the IRS, filling out paperwork and tax forms for the
IRS, those are all bright people that are very productive people but
they are working in the nonproductive sector of the economy. We take
them out, put them into the productive sector of the economy, we add
that to that $700 billion and then we adjust it to for inflation for
the last 12 years, you are over a trillion dollars a year is the size
of the anchor that the IRS, which is the anchor, and our economy is
dragging that trillion dollar anchor across the bottom, and think how
it sails free if we just cut the chain on that anchor, get rid of that
almost 10 percent of our $11.4 trillion gross domestic product.
But it is not just an anchor. We are dragging it but when we cut the
chain, we get to put that trillion dollars in the productive sector of
economy. And it adds to this economy and no one can calculate what that
does.
We all believe this economy doubles in 10 to 15 years, but I do not
think we have calculated when those nonproductive people go to work in
the productive sector of the economy. So that is the piece that really
moves me, when we have that kind of waste in government, to be able to
release that waste. Get rid of it. Cut the chain on the anchor and put
that trillion dollars' worth of capital in the productive sector of the
economy, and those people that are not producing today, that are
regulators into the productive sector of the economy.
And then on top of that, there are those folks out there that are not
participating in helping to fund this government. And I am talking
about the drug dealers, the prostitutes, the pornographers, the
tourists.
Mr. LINDER. The illegal labor.
Mr. KING of Iowa. Black market labor. Add those things up; I do not
know the numbers on some of those.
Mr. LINDER. I do.
Mr. KING of Iowa. I would be glad to know that.
Mr. LINDER. It is over a trillion dollars right there in the
underground economy. Just three portions of it in a recent book
published by an economy, pornography, illicit drugs and illegal labor
constitute a trillion dollar economy.
When I speak to groups, I always ask if there is a banker in the
room. If a banker raises his or her hand, I say everybody follow her to
her bank on Friday afternoon at 4 o'clock in the afternoon you will see
it. And they always just smile and grin because the contractor is
coming out paying off subs in cash. It happens outside of every bank in
America that does retail banking. It is huge.
We do not want to find new places to tax. We think everybody ought to
be paying fairly.

{time} 2215

Government's principal role ought to be neutral, not pick winners and
losers. That is why we tax services, as well as goods. We tax Internet
sales, as well as catalog sales, as well as local sales. We do not
believe that the guy down the street who builds a building, hires their
kids, goes to a church, votes at our elections should be put at a 7
percent disadvantage same as a dot-com. So we say this bill is drafted
with the first principle, that government's role is neutral, not
picking winners and losers.
Mr. GUTKNECHT. Mr. Speaker, if the gentleman would yield, I want to
thank both of my colleagues, and particularly the gentleman from Iowa
(Mr. King) because he has really been an educator for me.
I want to come back to an issue that we have not talked about yet
because I think it deserves to be talked about, and we hear about it
from our friends on the left. That is called the alternative minimum
tax, and frankly, it is interesting because it was created back in 1969
to make certain that everybody paid some taxes, right, and we created
all these loopholes for the ``wealthy.'' All of the sudden they
discovered that some of these people were actually taking advantage of
these programs so that they paid very little or no taxes.
They created this whole second tax system, the alternative minimum
tax, that says even if you qualify under all the rules, you play by the
rules as some people say, you wind up paying no tax, but you have to
recalculate your taxes. Now, all of the sudden, we are talking about
millions of Americans who are finding out, well, listen, I did the
right thing, I followed the forms, I played by the rules, I did
everything right, but now the IRS says, oh, oh, oh, wait a minute, you
have to recalculate your taxes; and under the AMT, you owe another
$3,000 or $5,000 or $10,000 or in some cases literally hundreds of
thousands of dollars in taxes.
Let me give you an example. One of my constituents is a wonderful
person, and he had made some incredibly lucky or smart investments,
depending on your perspective and had become relatively, well, some
people would say a very wealthy, man. He wanted to give his alma mater
$1 million. He could afford to do that. So what he did is he sold some
stock, and he gave his college a $1 million donation. That is a
wonderful thing to do, right? Well, the IRS came back the next year and
said you have got to recalculate your taxes; and for being a generous
benefactor of his college, under AMT, the IRS said you owe us another
$340,000 in taxes.
Now that was bad tax planning, and he did not spend enough time with
his auditors and his CPAs and lawyers and so forth, but that is one
example, but it happens every day.
Mr. LINDER. My daughter at 35, she is now 37, called me and she said
what in the world is AMT. She has got four little boys and the
deductions and a fairly decent income gets them into the AMT. When it
was set in 1969, it

[[Page H7561]]

captured 90,000 taxpayers. In 6 years, it will capture 35 million.
Mr. GUTKNECHT. Mr. Speaker, 35 million Americans, and this is the
point I want to make. Anybody who has ever been bit by the AMT will
never forget this.
One of the most beautiful things about what you are talking about,
and I want to thank both of you, is that under your plan they never
have to worry again about having to recalculate their taxes after they
have already paid what they think is their fair share.
Mr. KING of Iowa. Mr. Speaker, if the gentleman will yield, I will
just say that this tax policy, H.R. 25, the fair tax is about freedom.
There is so much freedom that we do not realize we have lost over the
last 91 or 92 years that we have had this Tax Code because we get used
to the IRS coming into our homes and into our offices, auditing us. I
was shut down once for 4 days while the IRS was going through all my
paperwork, and the frustration of having them dig through my paperwork,
pass Monday morning quarterback decisions upon the ethical decisions
that I made day by day by day, and to know that my business decisions
were contingent upon the tax implications, I had kind of gotten immune
to that a little bit. You get conditioned to it, and you forget that
your mind can be freed of that, and it can be focused on productivity,
how do you build a product or provide a service for the most
competitive price and the highest quality to turn the best profit that
you can. That is why you go to work every day. It has turned us into a
Nation of tax preparers and tax avoiders.
So about a year and a half ago, my 28 years in the construction
business, I got myself in a position here in this Congress where it
behooved me to sell that business, and the most likely person was my
oldest son. We did get that transaction done, but it took a long time
and it was very complicated. The tax implications were so great that I
almost lined everything up and just sold it, paid the taxes, washed my
hands because it was too hard to avoid all of the liabilities that
accrued with capital gains and the other taxes that came along.
To think, to eliminate inheritance tax, interest income, pension
income, capital gains, of course income personal and corporate, add all
of that up. Think about what happens when you have a whole different
structure here and you cease to punish productivity and you let people
amass all the capital they choose to amass. And on the good side of
this, this capital that you talked about, the cheaper industry, the
more available capital, the $6 trillion coming back from overseas, the
new capital that will be attracted ends up here in the best place it
can in our economy because that capital will go for research and
development, higher education, technological investments, capital
investments. All of these things improve the productivity of the most
productive workers of the world.
While we are doing that, we are able to take out an average 22
percent or maybe more out of the cost of everything we sell in this
country and abroad, and so our balance of trade today, which is about a
minus $503 billion with a B, goes to a plus number. That plus number
helps us a lot because every year foreign investors are owning another
half a trillion dollars' worth of U.S. assets at the rate we are going
with this negative balance of trade. It fixes the balance of trade.

As soon as somebody south of the border or in China or Africa or
wherever can get the capital together to buy a punch press or a lathe
or a brake, then they train their workers to run that; and we will
never get that job back again. But if we can discount the product we
are selling an average of 22 percent, that is the same as the neon sign
that says gas $1.80 out here on the street here today. We get to sell
ours for $1.40. We are going to come here to our shores till we cannot
produce at that price anymore. That means we hang on to the low-skilled
jobs here in this country. Some of them come back to this country, but
certainly we keep many of them far longer because we are more
competitive; and while we are doing that, we are enhancing the high-
tech jobs, the higher paid jobs where the future of America is.
We always have to be the fastest people on the economic treadmill,
the ones at the head of the curve. This tax plan puts the capital in
place, the incentives in place so that we can do that for a long, long
time to come.
Mr. LINDER. Mr. Speaker, the folks on the other side of the aisle
will worry about people getting too rich and who is going to benefit
from this and how you are going to hurt the poor. Let us just deal with
that for a second.
We are going to totally untax the poor. Today, people who are living
at or below the poverty level are losing 22 percent of the purchasing
power for the current system, and we are going to tax accumulated
wealth. For that couple that paid taxes all the money they earned over
the years, paid capital gains and then sold the business, paying taxes
on the interest they are earning today, we are going to tax them one
more time and they spend it. To those people I say, you are already
paying this, but what do you think about the freedom that the gentleman
from Iowa just talked about, to do what you want with that money and
not have to deal with that?
We are going to make people pay taxes when they choose to pay it by
how they choose to live, and everybody's free to do that.
The gentleman had another point on trade that I would like him to
expand what the rest of the world would do, because we talked about
this a couple of years ago.
Mr. KING of Iowa. Yes. By the way, I remember the first time we met
and that I approached and introduced myself. I asked a question of the
gentleman and that was, what does it do to psychology, to the politics
of America if every time Johnny or Sally, when they go to buy their
baseball cards or their Barbie doll clothes, they would have to reach
in their pocket, pull out a couple of dimes for Uncle Sam and put them
up on the counter? After that happens millions and millions and
millions of times across this country, for a generation or so, my
belief is that this that new generation of Americans steps up and
accepts personal responsibility, makes fewer demands on government,
which means then it slows the growth of government and makes us all
more responsible but also more free.
Now, a more free Nation of the United States of America, one with
this capital that is amassed that is being invested in higher ed and in
technology and in research and development makes this robust economy
here in the United States so strong, so robust that, for example, the
European Union is a good example. Their tax rates run up to 70 percent
in some of those countries. Ireland leveled it down, and there are 560
companies right now domiciled in Ireland because they lowered their
corporate taxes. But the continent of Europe would have to adopt some
form of our tax policy to even hope to compete with us in the world
market, or their capital will escape that continent and come here where
the jobs will come and the productivity will come and our industrial
base will come back again, as well as our technological base.
So when that happens, if the tax policy in this country promotes a
more personal responsibility, less demands on government, moves us away
from this socialist trend that we are moving towards, that will happen
in this country. It will also happen wherever our tax policy is put
into place, implemented; and that means when Europe begins to some
place down the road adopt a fair tax in the same way, they will also
see more freedom, more personal responsibility, less demand on
government. That means the entire planet eventually becomes more free
because we take the lead here in this country.
Mr. GUTKNECHT. There is a connecting point there that I want to
expand upon, and that is, once we do this, they will have no choice
because all of the sudden the rest of the world will turn to America
and say, look, if we can invest there and not be taxed, we are going to
invest even more of our resources in the United States. All of the
sudden, Europe, the former Soviet Union, Iraq, anywhere else in the
world, they are going to have to adopt tax policies similar to ours,
where we say to people, you can earn as much as you want, you can
invest as much as you want, you can risk as much as you want. We are
only going to tax you on your consumption.

[[Page H7562]]

Now I want to come back, though, to a question that sometimes our
liberal friends say, and the gentleman from Georgia (Mr. Linder) sort
of touched on this a few minutes ago, and that is, wait a second, poor
people spend more of their disposable income on things that they need,
and therefore, they will have to pay a lot more taxes than somebody who
makes $1 million a year and only has to spend 100,000 of it on the
things that they want or need just to live and so forth. How do you
respond to that?
Mr. LINDER. I respond to it that people do not put money under the
mattress anymore. Wealthy people spend more than poor people. They will
pay a higher share of the total cost of government; but to the extent
that they do not spend that money, they are going to put into banks or
into businesses and create jobs.
If they accumulate a great deal of wealth, I can tell you what they
are going to do with that, too. They are going to do what every great
wealthy family has done in the history of this country. They are going
to give it away. Another question raises charitable contributions.
People do not give money away because they can deduct it. They give
money away when they have more to give away. The more they have to give
away, they more they give away. The great fortunes that have been given
away in the history of this country were given away before the Tax Code
was ever in place. So they accumulate fortunes. They will invest it.
They will create jobs, grow companies, and then give it away.
Mr. GUTKNECHT. So there are only four things that people can do with
their money if you think about it. They can either spend it, they can
save it, they can pay taxes, or they can give it away. Those are the
only four things they can do.
Mr. LINDER. I would say they can create jobs with it because people
borrow it.
Mr. GUTKNECHT. Exactly, and when they save it and invest it, it
creates more jobs, more economic opportunity for the people at the
lower end of the spectrum. Right?
Mr. LINDER. Which creates more revenues to the Federal Government.
Mr. GUTKNECHT. Bingo.
Mr. LINDER. It has always been the case.
Mr. GUTKNECHT. But some of our friends think that we have to have
these people pay lots of taxes because that is a good thing. What we
are sort of saying is, well, we have to pay a certain amount of taxes,
but at the end of the day if they pay more in taxes, it means they have
less to invest or give away.
Mr. LINDER. And grow the economy with that investment.
Mr. GUTKNECHT. Bingo.
Mr. LINDER. It is really simple.
Mr. GUTKNECHT. Mr. Speaker, of all the things that people can do with
their money, the least efficient thing in terms of growing the economy
is to give it to the Federal Government because we know that the
Federal Government will spend it less efficiently than they will, and
that is a philosophical debate; and I understand that.
At the end of the day, we can create a system that is just as fair or
fairer than the system we have today because when people think about
it, you think about the average poor person. Everything that they buy
has embedded in it anywhere from 22 to 30 percent taxes.

{time} 2230

So they are paying the taxes. Businesses do not pay them. And in some
respects even wealthy people do not pay the taxes. It is the poor
people who pay them.
Mr. LINDER. Wealthy people pay taxes on personal consumption, and
wealth has no meaning unless it is spent on personal consumption.
If I had $100 million and lived in a $20,000 home and drove a used
car, that $100 million would mean nothing to me. So somebody would be
borrowing it, building their business with it, and creating jobs with
it. Wealth has value only when spent personally, and that is when it
will be taxed.
Mr. GUTKNECHT. So if I buy a $100,000 automobile, I pay a lot more
taxes than if I buy a $20,000 automobile. That is the way the whole
system works.
Mr. Speaker, we have to do a better job of explaining this to
everybody. Because I think, in the end, and I want to thank both my
colleagues, particularly the gentleman from Iowa (Mr. King), because he
has been helpful to me in beginning to understand.
Let me close for my part of this with two very important points made
by one of my favorite people from the United Kingdom, Winston Churchill
observed this about the American people: First of all, he said
Americans always do the right thing, once we have exhausted every other
possibility.
And I think we have really reached a point, when you look at the Tax
Code, that we have exhausted every other possibility. And it really is
time for us to do the right thing.
The other thing that he said is that the difference between someone
who is convinced of something--no, I am going to forget the story. Have
you got the story?
Mr. LINDER. You told it to me once. It is the difference between
someone who is a big believer and a fanatic.
Mr. GUTKNECHT. A fan. Yes, that is it.
The difference between a fan and a fanatic is that a fanatic cannot
change their mind and will not change the subject.
I have almost become a fanatic on this issue because this is
something that, if you think it through, begins to change the entire
paradigm. As the gentleman from Iowa said, it not only changes the way
we see government but it changes the way we react to government. In the
end, it says to Suzie and Johnny when they go in to buy something at
the store, wait a second, every time I buy something, it is 22 cents or
23 cents, or whatever the number is. And all of a sudden they begin to
see government as a real cost to them.
Mr. LINDER. That is correct.
Mr. GUTKNECHT. And they demand less of the government. So this is an
issue whose time has come.
It seems to me that we have a responsibility as Members of Congress
to go out and tell this story. And if we do our job of telling the
story, as Jefferson said, give the people the truth and the republic
will be saved. If we give the people the truth on this subject, then it
seems to me that ultimately they will demand that Congress do something
like this.
Mr. LINDER. Mr. Speaker, I will yield to the gentleman from Iowa for
any closing remarks he might have.
Mr. KING of Iowa. I thank the gentleman, Mr. Speaker, for yielding to
me once again, because there are a couple of things I would like to say
too at the end of this discussion.
When we talk about how many people are not paying taxes today,
everybody is paying taxes in the embedded cost of everything they buy,
and they do not realize that. But about 44 percent of the public does
not pay income tax in an income tax form. Forty-four percent. When they
get to the point where they are at 51 percent, they can simply come to
the government and make demands on the government to extract the rest
of the sweat from the brow of the people who are making a living and
earning.
So we are very close to that tipping point where we could lose the
center of this country. If it ever tipped over from 44 percent to 51,
then I think you would see the real slide towards the socialistic
state. We have been stalling it off here, but it has been incrementally
going in that direction. So I think it is important that everybody buy
in. And going to the fair tax does that. Everybody consumes. Everybody
buys into that policy.
For me, I started working on this in 1980. I was audited for 1979 and
it was in 1980 that they did so, and it was the second time. Too close
together. And with the frustration of that, I started with the
principle of let us eliminate the IRS. Now, what do we do to replace
the revenue?
I would sit at work every day and think my way through this. And it
did not take long for me to reject the other proposals on how we might
be able to replace the revenue. This is the only way to eliminate the
IRS and replace the revenue, and it is revenue neutral.
I kept turning this Rubik's cube around over and over again. What are
the unintended consequences? What happens to black market? What happens
if people reduce their consumption? And every time I turned that cube
around and looked at it another

[[Page H7563]]

way, there was an answer to it. The answer is actually better than you
anticipate in the beginning, and the picture got better and better and
better.
I do not think it is an overstatement to say that if you have a tax
policy that can solve problems, this tax policy solves virtually every
one that a tax policy can solve.
Mr. LINDER. Mr. Speaker, I thank both my colleagues for their help.
This has been an illuminating discussion and we need to do it again.

____________________