Ways and Means Talks Fair Tax

July 27, 2011

On July 26, Congressman Dave Camp (R-Mich.), Chairman of the Committee on Ways and Means, held a hearing on alternative tax systems, with a focus on tax systems that are based on taxing consumption rather than income. Specifically, the Committee considered the Fair Tax – a proposal to replace existing federal taxes with a national retail sales tax – and the Value-Added Tax (VAT), a type of consumption tax used by many other countries as a supplement to other taxes, such as taxes on individual and corporate income.

For several consecutive Congresses, legislation to repeal existing federal taxes on income, payroll, estates and gifts and replace them with a single national retail sales tax has been introduced as the Fair Tax Act (H.R. 25, S. 13). The legislation grants states the primary authority for the collection of sales tax revenues and the remittance of such revenues to the Treasury. It also would abolish the Internal Revenue Service (IRS) after fiscal year 2015, replacing it with a Sales Tax Bureau to administer the Fair Tax and an Excise Tax Bureau to administer remaining excise taxes formerly under the jurisdiction of the IRS. NSBA has supported the Fair Tax since its inception.

Many countries have adopted a different kind of consumption tax – the Value-Added Tax (VAT) – in addition to their income and other taxes. Under a VAT, a business pays tax on the value it adds during its stage in the production, distribution, and sales processes.  Generally, “value added” is measured as the difference between the price for which a business sells a good or service and the cost of the inputs the business incurred to produce it. Economically, however, a VAT is considered equivalent to a retail sales tax, in that the VAT paid at each stage of the process is passed on to the ultimate consumer in the form of a higher retail price.

The hearing considered separately these two different consumption tax models. One panel examined the advantages and disadvantages of a VAT, whether as a supplement to or full replacement for existing taxes. Another panel discussed the policy arguments for and against adopting the Fair Tax as a replacement for existing federal taxes. The hearing explored the economic impact of consumption tax systems, as well as issues surrounding administration and compliance.

The Fair Tax side had three speakers: former Governor of Arkansas Mike Huckabee as well as economic experts, Laurence Kotlikoff, Ph.D and David Tuerck. Bruce Bartlett spoke in opposition.

In announcing this hearing, Chairman Camp said, “While the Committee thus far has focused on reforming the income tax, tax proposals that would move us away from an income base and instead adopt consumption as the tax base have continued to generate interest as well. Supporters of such approaches believe that taxing consumption rather than income could have important economic benefits, and so as part of our efforts to reform the tax code, the Committee needs to examine those proposals. This hearing will allow the Committee to learn more about two of the most-discussed consumption tax proposals, the Fair Tax and the VAT.

Please click here for more on NSBA’s support of the Fair Tax.