Special FairTax Legislative Report – December 2014

To read this report as a PDF with additional graphics, click here.

As we noted in last week’s FairTax® Friday, we had an aggressive week of meetings in Washington, D.C. – meeting with Members of the House and Senate and key senior committee staff. The meetings were both productive and instructive regarding how the 114th Congress may be approaching near-term tax reform.

We found a general excitement in the halls and offices as the 113th Congress comes to a close and the 114th prepares for the opening gavel. It was clear that Members believe that the mid-term changes will lead to a resumption of more normal operations, which have been stalled for several years.

Newly-elected members are locating offices, retiring members are setting up K Street digs and Washington’s elite are hosting farewell and holiday receptions, which is where deals are being made, votes are being bartered and power is being solidified. Yes, the mid-term elections brought significant change but rest assured, the power elite will always try to protect the status quo – something we must not allow to happen.

To refresh, we met with:

  • Congressman Paul Ryan (WI-1), 114th Chairman, Ways & Means Committee
  • Congressman Kevin Brady (TX-8), Ranking Member, Ways & Means Committee, Co-sponsor H.R. 25
  • Congresswoman Lynn Jenkins (KS-2), Member, Ways & Means Committee, Co-sponsor H.R. 25
  • Congressman Rob Woodall (GA-7), Sponsor H.R. 25
  • Congressman Jim Bridenstine (OK-1), Co-sponsor H.R. 25
  • Congressman Paul Broun (GA-10 retiring), Co-sponsor H.R. 25
  • Senator Mike Enzi (WY)
  • Chief Tax Counsel, Ways & Means Committee
  • Executive Director, 113th Joint Economic Committee
  • Director of Economic Policy, 113th Joint Economic Committee
  • Senior Economist, 113th Joint Economic Committee
  • David Burton, Senior Economic Fellow, Heritage Foundation Co-author H.R. 25
  • Dan Mastromarco, AFFT Trustee, Co-author H.R. 25
  • Dr. Laurence J. Kotlikoff, Professor of Economics, Boston University and Author, FairTax economic studies

Across all of our meetings, there were several key themes that emerged. These themes focused on the importance of tax reform, an essential change to dynamic scoring and the importance of increasing the effectiveness of our grassroots efforts.

We found:

  • Tax reform continues to be on everyone’s discussion card.It is clear that tax reform will be a priority agenda item in the broader 114th Congress and the House Ways and Means Committee.
  • At least in the early part of the 114th, it appears that tax reform will be incremental versus bold and sweeping. This strategy, if it holds, would acknowledge the differences and difficulties between the majority party in the House and Senate, and the executive branch.
  • The general principle of a national consumption tax seems to be gaining broader acceptance across the political spectrum. The challenge remains gaining non-partisan consensus that a single rate national consumption tax cannot co-exist with an income tax, and the FairTax must be the preferred delivery vehicle.
  • The FairTax continues to be favorably viewed. Our challenge is to fully identify those Members who are supportive of the FairTax but who have not made public their private support. It is vital that we work to further educate them and provide them with the necessary encouragement to make public their support of the FairTax Plan.
  • It was considered essential that the FairTax campaign have significant numbers of paid members in targeted districts where we are trying to exert influence.
  • The recommendation continues to be that AFFT needs to increase our paid membership as a demonstration of the growing depth and breadth of citizen support.
  • There was significant interest in the negative impact the growing evasion problem will have on the current income tax code and how the FairTax would effectively address this problem. In follow-up, recent studies that were shared verbally with Members and staff to document the magnitude of the problem will be sent to key staff.
  • Congressman Ryan is very eager to ensure that dynamic scoring (he calls it “accurate scoring”) will be used in the evaluation of all tax reform plans (see below for a further explanation as to why this is so important to the FairTax campaign). According to recent media reports, the ranking member of the Senate Finance Committee (and expected Chairman in the 114th) Senator Orrin Hatch (UT), also enthusiastically supports the use of dynamic scoring.
  • It was strongly suggested that H.R. 25 must be scored again by the Joint Committee on Taxation (JCT) – this time using dynamic scoring – and one Member enthusiastically offered to lead the charge in getting this re-score underway.
  • It was repeatedly recommended that AFFT have key representative(s) in Washington at least one week per month, every month in 2015.

As a result of what we learned and the recommendations we heard, our immediate plan is to return to Washington for one week in mid-January, mid-February and mid-March.

Our goals will be to:

  • Introduce the FairTax to the newly elected Members of the House and Senate.
  • Visit every 114th co-sponsor of HR 25 and S 122.
  • Answer questions and concerns from Members who are favorably inclined towards the FairTax but who have not yet decided to publicly support it.
  • Identify areas of potential bi-partisan agreement on consumption taxes, scoring, elimination of the IRS etc., and how the FairTax benefits all Americans.
  • Establish trusted relationships with more key Members, staff and committee representatives.
  • Provide Members and staff with in-depth briefings and analysis, and become their “go to” expert on the FairTax.
  • Develop relationships with, educate and serve as a resource to senior tax and economic fellows at key public policy organizations in the greater Washington area.
  • Provide the FairTax voice at Washington-based tax reform coalitions.
  • Begin developing relationships with Washington area political, tax and economic journalists and bloggers.

These actions will be an interim measure while we continue our Club 535 fundraising that will fund a full-time Washington, D.C. FairTax office.

Since the Budget Act of 1974, the Joint Committee on Taxation (JCT) has the responsibility for scoring most revenue-related legislation, including tax reform legislation. The purpose of scoring is to predict the amount of money either raised or lost by the proposed tax legislation. The Congressional Budget Office (CBO) also provides scoring but generally does so for more limited revenue-affecting legislation like import tariffs.

The JCT consists of five members from the Senate Finance Committee and five members from the House Committee on Ways and Means.

The JCT Chairman rotates between the Senate and the House each Congressional term. In the 113th Congress, Senator Wyden (OR) chaired the JCT. In the first session of the 114th Congress, beginning in January 2015, the JCT will have six Republican members and four Democrat members, and will be chaired by Congressman Paul Ryan (WI-1). In the second session, beginning in 2016, the 114th Senate Finance Committee Chairman, Senator Orin Hatch (UT), will chair it.

By a majority vote, the JCT selects the chief of staff who then selects non-career staff. Career staff serve at the pleasure of the chairman and chief of staff and can be replaced at any time. The majority of the JCT will then direct the procedures used by the JCT staff in scoring legislation. Senator Hatch and Congressman Ryan have announced that they will insist that the JCT use dynamic, or as Congressman Ryan says, “Accurate Scoring.”

According to the JCT’s website (https://www.jct.gov/about-us/revenue-estimating.html),

“The starting point for a revenue estimate prepared by the Joint Committee staff is the Congressional Budget Office (“CBO”) 10-year projection of Federal receipts, referred to as the “revenue baseline.” The revenue baseline serves as the benchmark for measuring the effects of proposed tax law changes. The baseline assumes that present law remains unchanged during the 10-year budget period. Thus, the revenue baseline is an estimate of the Federal revenues that will be collected over the next 10 years in the absence of statutory changes. In providing conventional estimates, the Joint Committee staff assumes that a proposal will not change total income and therefore holds Gross National Product (“GNP”) fixed.”

Static scoring assumes that tax cuts will have no change on the economic behavior of affected individuals and no impact on economic growth. For example, static scoring assumes if $100 is taxed at 50% (producing $50 in revenue), and the government lowers the tax rate to 25% (now producing $25 in governmental revenue with a $25 revenue loss), the lower tax rate won’t encourage anyone to behave any differently than they currently do.

Dynamic scoring tries to estimate the changes tax cuts have on economic behavior. For example, dynamic scoring assumes that if a 50% tax on $100 produces $50 in revenue, then lowering the tax rate to 25% will produce $25 in revenue, as static scoring predicts, and predicts that individuals will work more (if it’s an income tax cut) or realize more capital gains (if it’s a capital gains tax cut, etc.) because they will get to keep more of their money. This changed behavior will produce an extra $100, for example, which is also taxed at $25, resulting in a total of $50 in revenue, and no loss for the government.

The logic behind static scoring reminds us of the story once told by a Member of the Senate Finance Committee in the mid-‘80s during another series of tax reform debates. Late one night the Senator, as a joke, asked the JCT to prepare a revenue estimate of all income over $250,000 per year if it was taxed at 100%. To his astonishment, the next morning the JCT sent over an estimate of how much additional revenue this would produce. The Senator was stunned that anyone would think that people would continue to work as hard when 100% of their income was withheld for taxes.

Economic Effects of The FairTax®

When static scoring is used to project the income produced by the FairTax (as was done in earlier scoring models on the FairTax prepared by the JCT and most recently in 2014), it does not take into account any of the economic benefits that will be produced by the FairTax Plan. More important, static scoring requires a higher FairTax rate to produce the same income as the present income tax code.

Dynamic scoring accounts for these variables and places the FairTax Plan on a much more level playing field with other tax reform measures that are being considered. All reform measures, however, can only be reviewed properly if all other assumptions, e.g. evasion etc., are properly stated and counted.

When the FairTax is properly scored using the dynamic scoring methodology, we are confident the contrast between the FairTax and the present income tax will dramatically reflect how the FairTax will:

  • Increase the rate of economic growth;
  • Increase U.S. job growth;
  • Increase federal revenues;
  • Reduce evasion; and
  • Provide all Americans with simple and fair taxation.

Our meetings this past week would not have been possible without your support. We thank you and ask you for your continued support. Now more than ever, it is vital that the FairTax have a steady and strong presence in the nation’s capital. Our campaign relies entirely upon your generosity – to have that presence we need your continued support.