I am one of the people who decides to locate jobs outside of the U.S. Specifically, I am the head of tax for a U.S. multinational. It is my job to advise that high value manufacturing and research should, from a tax point of view, be located outside of this country. I advise that it is better to invest cash in foreign operations than in American ones. If the recent tax proposal of House Ways and Means Committee Chairman Rangel becomes law, I will advise that good administrative jobs should be moved out of the U.S. I don’t like giving that advice, but under current law that’s what the numbers dictate. I want to change that.

Of course tax isn’t the only thing that governs the decision on where to put operations. My company has a set of activities that we can afford to keep in the U.S. out of loyalty, but if we did too much of that we’d be acquired by another (probably foreign) company. For the rest of the operations, it’s just math – add up relative labor and transportation costs and the cost of materials, figure in tax, and that tells you where to locate, excluding places with homicidal or corrupt governments. For the highest tech, highest profit operations, though – the ones that involve the best jobs – tax becomes dominant.

U.S. law currently provides that most income earned abroad is only taxed by the U.S. when you bring the cash home. So, if you make $100 in America you only keep $65 after the U.S. 35% corporate tax, but you keep the full $100 if you earn it in the Dominican Republic. When you reinvest that $100 of D.R. cash you can use the full $100 if you invest abroad, but only $65 if you invest in America, due to the U.S. tax bite. So you invest in new foreign operations, not American ones.

Changing the law to tax the D.R. operations currently would not work. America is not the only economy that counts any more, and most countries do not tax foreign earnings at all. If the U.S. immediately taxed foreign earnings, our companies would get acquired or crushed by competitors, and we’d just lose our headquarters jobs. Like it or not, it is a global economy now, and this country does not control it.

But there is a simple solution that works. Give corporations a deduction for dividends they pay, and make up the tax revenue by getting rid of special rates for capital gains and by imposing a 7½% tax on individual income over $500,000 a year, which is all it takes to be revenue neutral. That would make the U.S. the best location in the world for high value operations. It would restore our economy and give middle class workers market power.

There are plenty of proposals circulating for mostly hokey ways to stimulate our weak economy. The American people need to demand a real, long term solution. Change the rules so that I can tell my employer to put all the best jobs here.

Matt Lykken is a tax attorney and is Director of SharedEconomicGrowth.org. Details of the proposal can be found at http://www.sharedeconomicgrowth.org .

For INDIVIDUALS:
• No more tax on income – make as much as you wish
• You receive your full paycheck – no more deductions
• You pay the tax when you buy “at retail” – not “used”
• No more double taxation (e.g. like on current Capital Gains)
• Reduction of “pre-FairTaxed” retail prices by 20%-30%
• Adding back 29.9% FairTax maintains current price levels
• FairTax would constitute 23% portion of new prices
• Every household receives a monthly check, or “pre-bate”
• “Prebate” is “advance payback” for taxes payable on monthly consumption to poverty level
• FairTax’s “prebate” ensures progressivity, poverty protection
• Finally, citizens are knowledgeable of what their tax IS
• Elimination of “parasitic” Income Tax industry
• NO MORE IRS. NO MORE FILING OF TAX RETURNS by individuals
• Those possessing illicit forms of income will ALSO pay the FairTax
• Households have more disposable income to purchase goods
• Savings is bolstered with reduction of interest rates

For BUSINESSES:
• Corporate income and payroll taxes revoked under FairTax
• Business compensated for collecting tax at “cash register”
• No more tax-related lawyers, lobbyists on company payrolls
• No more embedded (hidden) income/payroll taxes in prices
• Reduced costs. Competition – not tax policy – drives prices
• Off-shore “tax haven” headquarters can now return to U.S
• No more “favors” from politicians at expense of taxpayers
• Resources go to R&D and study of competition – not taxes
• Marketplace distortions eliminated for fair competition
• US exports increase their share of foreign markets

For the COUNTRY:
• 7% – 13% economic growth projected in the first year of the FairTax
• Jobs return to the U.S.
• Foreign corporations “set up shop” in the U.S.
• Tax system trends are corrected to “enlarge the pie”
• Larger economic “pie,” means thinner tax rate “slices”
• Initial 23% portion of price is pressured downward as “pie” increases
• No more “closed door” tax deals by politicians and business
• FairTax sets new global standard. Other countries will follow

Add to that the operational structure of the FairTax,

• SIMPLE, easy to understand
• EFFICIENT, inexpensive to comply with and doesn’t cause less-than-optimal business decisions for tax minimization purposes
• FAIR, loophole free and everyone pays their share
• LOW TAX RATE, achieved by broad base with no exclusions
• PREDICTABLE, doesn’t change, so financial planning is possible
• UNINTRUSIVE, doesn’t intrude into our personal affairs or limit our liberty
• VISIBLE, not hidden from the public in tax-inflated prices or otherwise
• PRODUCTIVE, rewards, rather than penalizes, work and productivity

and it makes a compelling case to eliminate an average 50-hr/year requirement to file a tax return, and the placement of (non-business-owner) American families at risk for audits, interest, penalties, legal expense, even confiscation of property. (And, for those who do own a business, compliance would be much simpler and less expensive because the Act does not have a code that educes the bartering of tax favors by politicians and special interests, pitting sectors and socio-economic classes against each other.)

But this concept requires advocacy and money to succeed because, like Huckabee recently said at the end of an interview by a skeptical Cavuto at Fox News, “…the people [will have to] sell it to the Congress.”

Under the FairTax, if you earn $654, you will get to keep it all. The $500 rental payment will now become $650. You are no worse off. The landlord’s expenses will go down. They are not disadvantaged in anyway. The purchase of the property would be considered a business expense and not taxable. Their other expenses for maintenance, insurance, etc are considered business input expenses and not taxable. The seller of the materials they need to buy for that maintenance, the insurance companies selling protection services will also not be taxed on their inputs. Their income from rents will not be taxable. They will simply pay taxes at the retail level like everyone else. All this allows lower prices to be passed through to the renters. Whether lower prices will be passed through depend on supply and demand, just like currently. But even if prices didn’t drop at all, most Americans will be better off. Purchasing power definitely goes up by the increase in take home pay with or without pretax price reductions and now the citizen will be much more in control of their own burdens.

I realize that the standard deduction/personal exemption result in no net taxes for some, but the prebate under the FairTax accomplishes the same thing and it is larger at every family size…so we are concerned with the margins, not the first dollar.

I’m not sure if Joel’s comment was meant as it sounded, but to clarify, most home owners today do not itemize. The percent of Americans who itemize is around 34%. Those wil claim the home mortgage interest deduction is 27% and about 68% own their home…so a little less than 40% of home owners itemize their interest. Almost none of these will be the poor or the middle class because when you itemize, you must give up a $10,700 standard deduction (married filing jointly). If your total interest paid plus any other deduction aren’t at least that amount, you won’t itemize. (Based on interest alone, your monthly interest payment would need to be almost $900. How many poor or lower middle class can afford a $1,000 monthly house payment).

Even for those who itemize, this is not a great benefit. For example, it my total interest deductions were $13,000 for the year, at the same time I claim this deduction I give up another $10,700 deduction (the standard deduction) so my net benefit is only equal to the difference of $2,300 in deductions. Additionally, it is ONLY deductible for purposes of INCOME taxes, not for payroll taxes so I’m still paying 7.65% on the entire payment.

Under the FairTax, NONE of the base interest is taxable and that applies to 100% of Americans, the poor included. There is nothing to give up and the tax free status applies to the entire tax. The principal is only taxed on a new home so for the poor and middle class, home ownership becomes much more possible. Add to this the fact that savings will not be taxed which helps Americans save for a down payment quicker and the fact that interest costs are projected to decline by 25% making payments less expensive and you have a recipe for many more homeowners.

A final note, I have several low income clients who I help with cash flow issues. Many times an increase in income is turned down, not because they are lazy, but because an increase in income is subject to new taxes AND costs them in lost EITC as well. When adding these together, their effective marginal tax rate on new income sometimes goes over 50%. they are simply unwilling to work longer hours or harder for less than half their money. Under the FairTax, every extra hour of work or harder effort can be rewarded with 100% of its value. They will determine how it is treated for tax purposes by their own choices, but we will trully be rewarding hard work and savings, the two things we tell most Americans they should do.

For this reason and for the general reason that the government definition of poverty is greatly flawed, poor Americans won’t really get much if any help under the FairTax. Rents certainly won’t go down – and may well go up – when the current tax benefits of owning rental property disappear.

Prices after FairTax passage would look similar to prices before FairTax – not “30% higher” as opponents contend – competition would see to it. So, the FairTax rate (figured as an income-tax-rate-non-comparative, sales tax) on new items would be 29.85% (on the new, reduced cost of items because business isn’t taxed under FairTax – thus lowering retail prices by 20% to 30%), or 23% of the “tax inclusive” price tag – this is the way INCOME TAX is figured (parts of the total dollar).

The effective tax rate percentages, that different income groups would pay under the FairTax, are calculated by crediting the monthly “prebate” (advance rebate of projected tax on necessities) against total monthly spending of citizen families (1 member and greater, Dept. of HHS poverty-level data; a single person receiving ~$200/mo, a family of four, ~$500/mo, in addition to working earners receiving paychecks with no Federal deductions) Prof.’s Kotlikoff and Rapson (10/06) concluded,

“…the FairTax imposes much lower average taxes on working-age households than does the current system. The FairTax broadens the tax base from what is now primarily a system of labor income taxation to a system that taxes, albeit indirectly, both labor income and existing wealth. By including existing wealth in the effective tax base, much of which is owned by rich and middle-class elderly households, the FairTax is able to tax labor income at a lower effective rate and, thereby, lower the average lifetime tax rates facing working-age Americans.

“Consider, as an example, a single household age 30 earning $50,000. The household’s average tax rate under the current system is 21.1 percent. It’s 13.5 percent under the FairTax. Since the FairTax would preserve the purchasing power of Social Security benefits and also provide a tax rebate, older low-income workers who will live primarily or exclusively on Social Security would be better off. As an example, the average remaining lifetime tax rate for an age 60 married couple with $20,000 of earnings falls from its current value of 7.2 percent to -11.0 percent under the FairTax. As another example, compare the current 24.0 percent remaining lifetime average tax rate of a married age 45 couple with $100,000 in earnings to the 14.7 percent rate that arises under the FairTax.”

Further, per Jokischa and Kotlikoff (circa 2006?) …

“…once one moves to generations postdating the baby boomers there are positive welfare gains for all income groups in each cohort. Under a 23 percent FairTax policy, the poorest members of the generation born in 1990 enjoy a 13.5 percent welfare gain. Their middle-class and rich contemporaries experience 5 and 2 percent welfare gains, respectively. The welfare gains are largest for future generations. Take the cohort born in 2030. The poorest members of this cohort enjoy a huge 26 percent improvement in their well-being. For middle class members of this birth group, there’s a 12 percent welfare gain. And for the richest members of the group, the gain is 5 percent.”

It’s well past time to scrap the tax code and pay for government the way that America’s working men and women are paid – when something is sold.

(Permission is granted to reproduce in whole or part. – Ian)

2- Consumption taxes as they currently operate are regressive. However, to see a consumption tax plan that’s not regressive, go to FairTax.org. They provide a “prebate” that would cover the sales tax on all spending up to the poverty line, so that most if not all poor and low wage families would effectively pay no taxes. A consumption tax also eliminates the vast majority of tax shelters because when you spend, you’re taxed, and it’s a lot easier to hide your income than hide your spending!

Also, a flat tax would be extremely regressive, as the lower income folks spend a disproportionate portion of their income rather than saving it.