Can GOP get rid of the IRS?

0 Comments | Insight on the News, April 1, 1996 | by Michael Rust

With the ebb of sentiment for a flat tax, the concept of a national sales tax is growing in Congress.

Ignore for a moment the shallow graves along the campaign trail marked with the names of Sen. Phil Gramm, Sen. Arlen Specter and California Gov. Pete Wilson. The biggest casualty of the 1996 presidential race might turn out to be the flat tax which, though recently hailed as a centerpiece of Republican economic policy, has suffered the one-two punch of media skepticism and the fade of its leading advocate, semibillionaire publisher Steve Forbes.

However, if the flat tax is fading into the political sunset, an even more radical proposal -- a national sales tax -- may rise to replace it.

As Senate Majority Leader Bob Dole spent early March solidifying his status as the leading candidate for the Republican presidential nomination, GOP House members introduced legislation to create a national retail-sales tax, or NRST. The cosponsors -- Reps. Dan Schaefer of Colorado, W.J. "Billy" Tauzin of Louisiana and Dick Chrysler of Michigan -- were joined at the March 7 kickoff press conference by fellow Republican Reps. Sonny Bono of California and John Linder of Georgia. Within a few hours, they had gained their first Democratic cosponsor, Rep. Ralph Hall of Texas.

In back of these men, however, stands a powerful figure whose support gives the proposed sales tax instant credibility. "Bill Archer is our guiding light," Tauzin tells Insight. Archer, the veteran Texas Republican who leads the tax-writing House Ways and Means Committee, has been promoting replacement of the graduated income tax with some sort of national consumption tax since the GOP takeover in 1994 and had scheduled hearings to begin at the end of March on tax-reform proposals. "He's blessed our efforts," says Tauzin. Before the end of the 104th Congress, the chairman will "probably reintroduce it with his changes and it will become the committee's alternative to the current income-tax system."

Suddenly there is shoving and elbowing among tax reformers pushing their way to the front of the policy line. Ever since the Kemp-Roth tax-cut bill breathed life into a moribund GOP in the late seventies, a makeover of the tax system has been a favorite Republican theme. Earlier this year, a commission headed by former HUD Secretary Jack Kemp and blessed by Dole and House Speaker Newt Gingrich endorsed the concept of the flat tax, which has been boosted enthusiastically by House Majority Leader Dick Armey of Texas.

However, the purer versions of a 17 percent flat tax, endorsed by Armey and Forbes, drew heavy fire in the early days of the campaign, culminating just before the New York primary when front-runner Dole blasted the Forbes plan's elimination of the home-mortgage deduction. Advocates of repealing the income tax in favor of a consumption or sales tax say their plan takes the flat tax one step further with more political appeal.

The NRST would eliminate the Internal Revenue Service and establish a 15 percent tax on goods and services sold at retail. There would be no tax added at any level of production and a rebate would be provided for people under the poverty line. Proponents argue that this would eliminate the "hidden tax" corporations add to their products to pass the cost of taxation on to the consumer. And this, they say, would benefit both consumers and producers.

Tauzin says the NRST could be a unifier, offering something to backers of both Forbes and Pat Buchanan. Forbes supporters would get radical tax reform without appearing to favor the wealthy, he suggests. "Forbes is politically embarrassed by his proposal because he has to admit that his dividend income would not be taxed, whereas his workers' income would be. Under our proposal, Forbes would pay tax on his filet mignon just as we pay it on our hot dogs." At the same time, Buchanan backers, concerned about the decline of the U.S. industrial base, would be receptive to the way in which a NRST would remove hidden costs from U.S. exports. And militantly antigovernment conservatives presumably would respond to the abolition of the IRS, as would business at all levels.

"For the first time in this free-trade world, we're creating an advantage rather than a disadvantage for American products," says Tauzin. Products coming into America would face the same retail-sales tax "that American-made products are already paying in hidden taxes" while U.S. products will go overseas unhampered by the hidden costs brought by taxation. "We will create a 30 percent advantage for American-made products," Tauzin says. "Do I have to guess how many jobs that's going to create, how many more American-made products are going to enter our marketplace, how much more competitive we're going to be?"

In fact, proponents of the sales tax can mount arguments geared toward all sides of the political spectrum, its advocates say. Conservatives concerned about the growth of government will applaud the demise of an intrusive IRS while liberals concerned about growing inequality in society will be offered a tax system that punishes run-amok consumption by the wealthy as it rewards frugality and encourages job-creating savings and investment. At the same time, the sales tax would reach into the murky depths of the underground economy, where people earning cash off the books have held the tax collector at bay.