Tax System Problems and Flat Tax Solutions Presented by: Dick Armey Co-Chairman, FreedomWorks To The President’s Commission on Tax Reform

The Tax System is Broken  “The American people deserve—and our economic future demands—a simpler, fairer, pro-growth system.” President George W. Bush, Republican National Convention, 2004President George W. Bush, Republican National Convention, 2004  This is what the American people want

The Tax System is Broken  The American People know the system: Is too complex Is too complex Is unfair Is unfair Hinders economic opportunity, savings, investment, and job creation Hinders economic opportunity, savings, investment, and job creation Undermines good government Undermines good government

How to Fix the Tax System  There is considerable agreement that the current system needs to be scrapped for one that is simpler, fairer, and pro-growth  Less agreement on what it should be replaced with  Flat Tax best addresses these concerns National sales tax should not be introduced unless 16 th Amendment is repealed, otherwise we could have European-level taxation with both income tax and sales tax National sales tax should not be introduced unless 16 th Amendment is repealed, otherwise we could have European-level taxation with both income tax and sales tax

What a Flat Tax Would Look Like  Liberating in its simplicity  Starts with scrapping current code  All income—business and individual— would be taxed only once and at one rate  Only exemption: personal exemption so every family can cover their expenses before paying the government

What a Flat Tax Would Look Like  All deductions and credits eliminated No breaks for special interests No breaks for special interests No loopholes for powerful lobbies No loopholes for powerful lobbies No favoritism towards some citizens and harassment of others No favoritism towards some citizens and harassment of others No tax breaks for corporations No tax breaks for corporations No tax shelters No tax shelters No depreciation schedules No depreciation schedules No tables No tables All Americans treated equally All Americans treated equally

Flat Tax Solves Current Tax Code Problems  Current Problem: Complexity 8 billion pages of forms from IRS yearly 8 billion pages of forms from IRS yearly Compliance time: 6.6 billion hours Compliance time: 6.6 billion hours More than spent building every motor vehicle in the countryMore than spent building every motor vehicle in the country Compliance costs: $194 billion annually Compliance costs: $194 billion annually Over 26 hours to complete 1040 Over 26 hours to complete 1040  Flat Tax Solution: Simplicity One post card per taxpayer Income – personal exemption x rate = tax liability That’s it

Flat Tax Solves Current Tax Code Problems  Current Problem: Unfair All Americans not treated equally All Americans not treated equally Taxpayers with similar incomes can pay vastly different amounts Taxpayers with similar incomes can pay vastly different amounts  Flat Tax Solution: Fairness All Americans treated equally Still progressive

Flat Tax Solves Current Tax Code Problems  Current Problem: Hinders Economy Punishes savings, work, and entrepreneurship Punishes savings, work, and entrepreneurship Reduces investment Reduces investment Distorts financial decisions Distorts financial decisions Jorgenson: $1 raised costs economy $1.39 Jorgenson: $1 raised costs economy $1.39  Flat Tax Solution: Prosperity All economic activity treated equally, promoting economic efficiency, increasing prosperity Savings not discouraged, increasing productivity

Flat Tax Solves Current Tax Code Problems  Current Problem: Undermines Good Governance Lobby industry is DC’s biggest private sector employer Lobby industry is DC’s biggest private sector employer Since 1998 alone: 483 companies have lobbied the IRS with 2,884 tax lobbyists Since 1998 alone: 483 companies have lobbied the IRS with 2,884 tax lobbyists  Flat Tax Solution: Transparency No special interest deductions for which to lobby See chart

More tax code, More lobbyists

Common Concerns  Mortgage Deduction Flat tax would lower interest rate by more than loss of deduction Flat tax would lower interest rate by more than loss of deduction  Increase deficit? No, can be revenue neutral No, can be revenue neutral  Progressivity? Flat and still progressive Flat and still progressive  Index family allowance? Yes Yes

Common Concerns  Will charities suffer? No, charitable donations track income, not tax benefits No, charitable donations track income, not tax benefits

Flat Tax Solves Current Tax Code Problems  It’s simple (Income – Personal Deduction) x Rate = Tax (Income – Personal Deduction) x Rate = Tax  It’s fair Popular with Americans because it embraces core American belief: That we should all be treated equally Popular with Americans because it embraces core American belief: That we should all be treated equally  It’s pro-growth Ends distortions by treating all economic activity equally Ends distortions by treating all economic activity equally  It’s the right thing to do