The%20BEST%20Tax%20(The%20Broad%20Economic%20Simplification%20Tax%20Plan)

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The BEST Tax(The Broad Economic Simplification
Tax Plan)

• Presented by
• David R. Burton
• Partner, The Argus Group
• Senior Fellow, Free Enterprise Fund
• 46 S. Glebe Road, Suite 101
• Arlington, VA 22204
• 703-521-3900

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Overview

• The BEST Tax would repeal
• the individual income tax,
• the corporate income tax, and
• the estate and gift tax.
• The BEST Tax would replace those taxes with
• A national sales tax, and
• A business transfer tax.
• The BEST Tax would protect poor and lower middle
  income taxpayers with rebates, paid in advance,
  of sales tax paid on spending up to the poverty
  level.

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The National Sales Tax Component

• The national sales tax component would
• Tax all purchases of goods and services when sold
  to consumers for the first time.
• Avoid cascading and hidden taxes by not taxing
  business inputs and investment.
• Include a rebate to protect all Americans from
  sales tax on essential goods and services.
• Treat all education and job training expenditures
  as an investment in human capital.

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The BTT Component

• The business transfer tax (BTT) component would
• Tax gross receipts from the sale of goods and
  services.
• Allow business to deduct the cost of purchasing
  goods and services from other businesses capital
  investment is therefore expensed.
• Exclude gross receipts from export sales from the
  taxable base.
• Impose a border adjustment on imports.

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The Tax Base

• Both the BTT and the sales tax are
• destination principle consumption taxes
• neutral between savings and consumption
• neutral among types of investment
• neutral between capital and labor and
• neutral between foreign-produced and U.S.
  produced goods and services.

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Comparison to Current Tax Base

• The current income tax
• is an origin principle tax, encouraging
  businesses to locate production outside of the
  U.S. and providing to foreign firms a relative
  advantage in the U.S. market and abroad.
• taxes on a world-wide basis, which encourages
  production and corporate headquarters to leave
  the U.S.
• is biased against savings and investment and in
  favor of consumption.
• treats different types of investment and business
  activity very differently, which is both unfair
  and economically damaging.

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Tax Rates

• Over the period 2000-2004, the BEST Tax would be
  revenue neutral with
• a sales tax rate of 8.4 percent and
• a business transfer tax of 8.4 percent.
• Note These figures were developed by Fiscal
  Associates using Joint Committee on Taxation
  methodology. In the real world, the required tax
  rates would be lower due to growth effects. The
  BTT tax rate is tax inclusive sales tax rate is
  tax exclusive.

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Economic Growth

• The BEST tax plan would be extremely pro growth.
• Lower marginal tax rates and a neutral tax base
  will increase work, savings, investment.
• Higher investment would yield higher
  productivity, lower costs and higher output which
  in turn will increase employment, wages and
  consumption.
• A level international playing field will increase
  U.S. business activity. Corporate headquarters
  would come to the U.S. (or stay) because the
  system is territorial production would come to
  the U.S. (or stay) because the system is
  destination principle (i.e. border adjusted).
• The most attractive investment climate in the
  developed world will draw capital from throughout
  the world.
• The BEST plan can be expected to increase GDP and
  wages by 10 to 15 percent over baseline within
  the first decade (based on work by Kotlikoff,
  Jorgenson, Robbins and others).

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The Current Tax System Harms Competitiveness

• The current tax system imposes a heavy tax on
  U.S. producers, whether their goods are sold in
  the U.S. or abroad.
• The current tax system effectively imposes no tax
  burden on foreign producers.
• All other OECD countries collect a large
  proportion of their revenue from destination
  principle taxes that abate taxes on their exports
  and impose taxes on U.S. goods entering their
  country.
• U.S. corporate tax rates are among the highest in
  the world.
• U.S. capital recovery allowances are inadequate.
• The taxation of world-wide income places U.S.
  firms at a competitive disadvantage.
• The BEST tax plan would address all of these
  problems.

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Evidence of Declining Competitiveness

• Manufacturing as a share of the economy has
  fallen dramatically and continues to fall (from
  25 percent in 1970 to less than 13 percent now).
• Manufacturing employment has fallen to only about
  10 percent of the total.
• The merchandise trade deficit is nearly six
  percent of GDP.
• The capital surplus is NOT being used to fund
  investment but to fund current consumption.
• The U.S. is mortgaging its future.

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Manufacturing as a Share of the Overall Economy
Source Calculations using NIPA data.
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U.S. Investment and International Capital Inflow
Source Calculations using NIPA data
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Jobs and Wages

• The BEST Tax plan will
• Create more jobs and increase wages by increasing
  the capital per worker, by enhancing
  productivity, by making the economy more
  efficient and by eliminating the tax bias against
  U.S. workers and U.S. producers inherent in the
  current system.
• Reverse the decline in high-paying manufacturing
  jobs.
• Reverse the outsourcing of service sector
  employment.

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The Sales Tax Rebate

• The annual sales tax rebate is equal to the sales
  tax rate times the HHS poverty level. It will be
  provided monthly, in advance through withholding
  table adjustments for employees, through benefit
  check adjustments for retirees and through direct
  payments to others. There is an extra amount for
  married couples to prevent a marriage penalty.
• Annual Consumption Spending That is Tax Free Due
  to Rebate

Household Size Unmarried Married
One 9,570 n.a.
Two 12,830 19,140
Three 16,090 22,400
Four 19,350 25,660
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Fairness

• All Americans can consume essential goods and
  services free of consumption tax.
• The BEST plan exempts the poor from the sales tax
  and reduces the tax burden on the lower middle
  class.
• The BEST tax dramatically reduces the marginal
  tax rates on the working poor and the lower
  middle class (especially for those in the EITC
  phase-out range).
• The BEST tax is progressive.
• The BEST tax will improve the material well-being
  of virtually all Americans.
• The BEST tax will increase upward mobility.
• The BEST plan taxes people based on what they use
  for themselves, not what they contribute to
  society.

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Effective Tax Rate by Consumption Class (Married
Couple, Two Children)
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Simplicity and Compliance Costs

• Unlike the complex morass that is the Internal
  Revenue Code, the BEST plan is simple.
• Only businesses need to file a tax return.
• Individuals file a one page form indicating who
  lives in their household and their Social
  Security number(s).
• Sales tax returns will reflect sales to
  consumers.
• Business transfer tax returns will reflect
  information that all businesses must keep in the
  ordinary course of business.
• Compliance costs will drop dramatically.
• The BEST plan reimburses businesses (1/4 of one
  percent of taxes collected) for the cost of
  compliance.
• The policy goals of tax preferences are best
  handled by spending programs.

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Intrusiveness and Privacy

• Under the income tax we must report a great deal
  of private information to the federal government,
  including how much we earn and from what sources,
  what charities we support, what property we own,
  where we invest, our medical expenses and so on.
• Under the BEST plan, there is no need to report
  anything to the federal government unless you are
  in business.

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Housing

• Housing will become more affordable under the
  BEST tax.
• Mortgage interest will be paid from pre-tax
  income by everyone (which is the result that the
  current mortgage interest deduction achieves for
  itemizers).
• Interest rates should fall toward the tax-exempt
  bond rate since interest is neither taxable nor
  deductible.
• Landlords of rental real estate will be able to
  expense their structures.

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Charities and Charitable Giving

• The BEST tax would reduce the cost of charitable
  giving because all taxpayers would be able to
  give to their favorite charity free of any tax.
• Today, only itemizers are able to make gifts from
  pre-tax dollars and over 70 percent of taxpayers
  do not itemize.
• Giving tends to be most responsive to income,
  staying relatively stable as a percentage of
  income. Under the BEST tax, incomes will grow
  dramatically. Thus, so will giving.
• The BTT would allow businesses to deduct
  charitable giving.

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Conclusion

• The BEST tax plan offers a plan that can achieve
  wide public acceptance and will
• promote economic growth and higher wages by
  reducing the bias against work, savings and
  investment
• place U.S. workers and businesses on an equal
  footing with their foreign competitors
• be fair
• be simple and
• be transparent and understandable.

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Appendix
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Education

• The BEST tax treats education as a human capital
  investment and does not subject tuition to sales
  tax or the government consumption tax.

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Health Care

• There is no special treatment for health care
  expenses.
• One of the major contributing factors to our
  spiraling health care inflation is the tax system
  because it provides a major incentive for
  employers to purchase health insurance on behalf
  of employees.
• Employer-provided health insurance means that
  those using or providing health care services
  (doctors and patients) have virtually no
  incentive to economize.

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Social Security

• The BEST tax does not change Social Security
  benefits, social security payroll taxes or the
  Social Security trust funds.
• Social Security benefits would no longer be
  subject to income tax.
• Most seniors would find the rebate protects a
  large proportion of their spending from tax.
• Benefits would be indexed on a sales tax
  inclusive basis.

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Government

• The BEST tax taxes government consumption.
• It is important that government consumption (e.g.
  government provided trash collection, health
  clubs, electricity, etc.) are taxed so that
  consuming through government is not tax
  preferred.
• Government enterprises are taxed like businesses.

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Transition

• In the case of the sales tax, relatively few
  transition rules are necessary. The BEST tax
  provides for a transition rule for inventory held
  on the changeover date. This inventory will not
  have been deducted for income tax purposes (i.e.
  will have been acquired with after-tax dollars)
  but will be subject to sales tax. To prevent
  double tax, a sales tax credit is provided.
• In the case of the BTT, allowances are made for
  deducting unrecovered basis in equipment,
  structures and inventory by placing the basis in
  three pools roughly corresponding to the period
  over which it would have been recovered under the
  income tax and deducting it on a straight-line
  basis.
• There may be a few other areas where transition
  rules are appropriate. However, these rules may
  be funded by taxing those on the opposite side of
  the transaction who are experiencing a windfall
  gain.

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Administration

• The BEST plan will be much easier to administer.
• Audits will be dramatically less complex thus a
  given amount of enforcement resources will enable
  more audits to be conducted.
• Major sources of complexity will disappear (e.g.
  qualified pension plans, employee benefit rules,
  uniform capitalization rules, inventory
  accounting, capital cost recovery and recapture,
  the taxation of financial transactions, income
  sourcing and expense allocation rules, controlled
  foreign corporation rules, tax-free exchanges,
  tax-motivated estate planning, etc.).
• States have the most expertise administering a
  sales tax and will be afforded the opportunity to
  administer the federal sales tax for a fee.

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Fiscal Federalism

• The federal sales tax and business tax base are
  likely to serve a harmonizing function.
• In both cases, the federal tax base is broader
  than current state taxes, so state tax rates can
  come down.
• Most states would probably give up the income
  tax.
• Under the BEST tax, states with conforming tax
  bases would be able to tax inbound internet or
  direct mail sales.

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Evasion and Avoidance

• Research indicates that evasion is primarily a
  function of the tax rate (the benefit from
  cheating) and the likelihood of getting caught.
• The BEST plan would substantially reduce marginal
  tax rates (reducing the benefit from cheating).
• The BEST plan would dramatically increase the
  chance of getting caught since audit rates would
  increase if enforcement spending is held
  constant.
• Thus, evasion will go down.
• Lawful avoidance will decline since sheltering
  opportunities have largely been eliminating.

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End of Appendix