Should We Scrap the Tax Code?

That's the vision syndicated talk-show host Neal Boortz and Rep. John Linder (R-Ga.) are trying to sell to the public.

The two are leading proponents of FairTax, a movement to replace the federal income tax with a national sales tax. They're pitching the plan in "The FairTax Book," released last week.

The authors, who have been pushing for tax reform for more than 20 years, want to abolish the current system, along with the Internal Revenue Service, and replace it with a consumption tax. FairTax would scrap most federal levies — personal, estate, gift, capital gains, Social Security, Medicare and more — in favor of a straight 23% sales tax on the purchase of goods and services.

To say that the current tax system is complicated is an understatement. Since 1954, the number of words in the IRS regulations that explain how to calculate, report and pay taxes has increased 939%, according to Boortz and Linder. And it's expensive to comply with the tax code. Citing figures from the Tax Foundation, a nonpartisan tax research organization based in Washington, D.C., the total cost for Americans to keep up with the increasingly complex tax code hit $203 billion in 2003. That includes money paid to accountants, time spent sorting documents and filling in forms, and the effort wasted cursing the 16th Amendment of the Constitution, which grants Congress the power to tax. Add in the expense of making "tax decisions" rather than "economic decisions" (that is, making decisions that will reduce your taxes rather than increase your income), and the nonpartisan Congressional Budget Office puts the cost of tax compliance at a staggering 18% of gross domestic product.

SmartMoney.com spoke with Boortz to get a clearer idea of how FairTax, which the co-author himself calls "too good to be true," would succeed in simplifying the tax code — and at what cost.

SmartMoney.com: What is the FairTax?

Neal Boortz: It is a consumption tax that replaces all other individual and corporate taxes, except for some excise taxes, like [that] on phones. Did you know that we've still got to pay taxes on phones to pay off the Spanish-American War?

Quite frankly, this plan sounds too good to be true. I've been studying the idea of a consumption tax for over 20 years. I've been studying it, preaching it, reading about it. My friend, Congressman John Linder and I — it's always been a constant topic of conversation. He wrote H.R. 25 [the FairTax bill], and there will be a vote on it next year.

SM: Why should American taxpayers get excited about something like this?

NB: With the FairTax, all of our federal taxes that are taken out of our paycheck disappear. Income tax, Social Security tax, alternative minimum tax, gift tax, capital gains tax, corporate income tax — are gone. All gone. We get 100% of our paycheck. Investments, stocks, bonds, give it to your kids, hide it in your mattress. When we spend money, there's an inclusive 23% — it could be lower — sales tax on all goods and services at the retail level. Does this make consumer items more expensive? No. There's been $22 million spent in research and developing this tax idea. It was developed by economists and accountants, and ordinary Americans. It's not a tax plan developed by politicians. In the cost of everything you buy now, there's an average of 22% tax embedded in it. Houses might be as high as 26%....These taxes all go away. When they do, retailers and individuals and businesses are operating without any tax consequences. Those taxes are gone and are replaced by an inclusive sales tax. You could see the price of consumer items remain just about the same. You're not paying any more for the stuff. And here's the kicker: It has a "prebate" every month.

When we did focus groups, people said, I don't think I should be taxed on the basic necessities of life. So every month every head of household gets a prebate check equal to the amount of sales tax you'd be expected to spend on the basic necessities, on what you'd spend in a month. It's based on the poverty level. You invest and save with no tax consequences. You only get taxed on the retail level. Plus you're reimbursed for sales tax.

SM: How is it revenue neutral? How does the government generate revenue without income taxes?

NB: That 23% inclusive sales tax — every penny is sent to the federal government. If you buy a $100,000 diamond, the federal government gets $23,000. That 23% level is the level we need to make this revenue neutral so the government gets the same amount of money as it was getting under the income tax. Revenue neutral here means tax reform is to be nothing more than a tax reform program, to treat every person in the country exactly alike under tax law. It is going to send the same amount of money to the government under this plan that it got under the current plan. It's not higher or lower, it's neutral.