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A 'flat world' needs a flat tax to level the playing field

Thursday, October 27, 2005 By Sen. Jim DeMint If you are not convinced America needs serious tax reform and you have not read "The World is Flat" by Tom Friedman, you should start reading his book. Friedman is no conservative. In fact, his book is grossly unfair to President Bush and not particularly flattering to Republicans. But Friedman finds himself backed into a conservative corner. The more he discovers about how today's global economy works, the more obvious it becomes that a solution built on conservative economic principles is vital to securing America's future. Friedman's conclusions can be summarized as follows: if the United States is going to grow and prosper in a flat world, it must be the best place in the world to invest and run a business, and it must cultivate and reward a workforce with the character and skills to compete in a global economy. I could write pages on how our expanding regulations, costly litigation, poor energy policy and a failing education system are making America a less desirable home for capital, but today I want to focus on the biggest job killer in America: the federal tax code. Advertisement The cost and complexity of our tax code is legendary. The IRS tax code is now more than 45,000 pages long, it forces Americans to spend over six billion hours each year learning rules and filling out forms, and it creates over $200 billion in annual compliance costs. It even penalizes savings through double, triple and sometimes quadruple taxation. We also punish companies that locate in the United States. Nearly all of our major economic competitors have tax systems based only on the activity that occurs in their territory, but America continues to operate with a worldwide system that taxes profits, domestic and foreign. Our tax system is slowing our economic growth and killing our economic advantage. While other countries like China and India are doing everything they can to attract investment, we seem to be doing everything we can to chase it away. Both major political parties are to blame for America's sorry predicament. Republicans are guilty of adding thousands of special interest provisions to the tax code, using deductions, credits and other tax exclusions to pick winners and losers. Those items must be taken out.

Meanwhile Democrats are guilty of trying to redistribute wealth using multiple income tax rates that sound good, but ultimately punish work and make it more difficult for low-income earners to climb the economic ladder. Those rates must be flattened. Recently the President's Advisory Panel on Tax Reform issued recommendations for small, incremental changes, disappointing tax reform advocates. While the panel made some good recommendations, America needs bold leadership to affect change. We need to pull our tax code up by its roots and replace it with a code that is fair, simple and pro-growth. That is why I'm introducing the "8.5 Percent Tax Reform Plan" with Sen. Lindsey Graham. This plan is significant, yet very simple. First, the plan would replace all individual federal income taxes with a flat 8.5 percent national retail sales tax. There would be no more taxes on capital gains, no more taxes on death, no more taxes on Social Security benefits, and 130 million tax filers could forget about April 15. Second, the plan would provide a universal rebate to all Americans for sales taxes paid on consumption up to the poverty level. This rebate would be applied to every worker's payroll tax, reducing the largest tax most Americans pay and ensuring that no American is forced to pay taxes on their necessities. Third, the plan would replace all corporate income taxes with a flat 8.5 percent business transfer tax. Companies could expense everything they buy in the year they buy it, exports would be exempt, and profits from overseas subsidiaries could come home tax-free. The 8.5 percent Tax Reform Plan is simple, fair, transparent and revenue-neutral. It protects the poor, encourages savings and investment, and levels the playing field for U.S. manufacturers and exporters. Individuals would pay taxes based upon what they consume, not what they save, and corporations would pay their part of the federal tax burden without being penalized in the global economy. We can still provide additional incentives for home purchases, charitable donations and other social goals, but we must do it with direct payments that do not complicate the tax code, and are clearly visible to American taxpayers. For example, this plan gives low-income Americans a hand up through a matched savings program to help them save for education, buy a house or start a business. America is engaged in a knock-down-drag-out global competition without protective borders. We cannot protect our way to prosperity; we must compete! The world is now flat and we need a flat rate tax code that will give our workers and businesses a fighting chance.