How to dismantle the IRS
Geoff Metcalf interviews tax-reform activist Carrie Ardelian

By Geoff Metcalf
Editor's note: As Congress and President Bush jump headlong into a battle over tax cuts, one large taxpayers' organization is convinced that the income tax should be scrapped completely in favor of a single-rate retail sales tax. Such a tax, the argument goes, would free up billions of dollars in collection and filing costs and would bring true fairness to the tax system. Carrie Ardelian preaches a national sales tax with clarity and vigor. She is with Americans for Fair Taxation, which boasts over 400,000 members nationwide. WorldNetDaily writer and talk-show host Geoff Metcalf recently interviewed Ardelian about her organization's efforts in revolutionizing American taxpaying.

Question: Explain to our readers what your organization is all about?

Answer: Americans for Fair Taxation started as an organization about five to six years ago and didn't start out looking to be a single-issue advocacy organization. They started as a research organization. Similar to what you do going out and talking to people, we chose to do the same thing when we started to look at the income tax.

Q: What were you originally called?

A: We were originally Americans for Fair Taxation but we also had The National Research Tax Committee that we used as an educational organization to do the research.

Q: It was the National Research Tax Committee I first spoke to about five or six years ago.

A: Yes. The IRS obviously keeps you from making any political conversations when you have an educational foundation. So we had a research arm where we actually went out and took focus groups all over the nation, a diversity of Americans, and said, "Listen. We know you hate the Internal Revenue Service. You hate taxes. But if you had to have a tax system, what would it look like?"

And we gleaned certain tenets from that research, things I'm sure you've heard from interviewing people over the years. People basically wanted a tax system that was fair, in that it was visible. They knew what they were paying. They knew what their government was costing them. It didn't have the loopholes and deductions that exist today. It was careful to be sure that the poor and the elderly were taken care of, etc., etc. It had certain basic tenets that people wanted out of a tax system that they didn't feel they were getting today with the abuse and the nature of the IRS and the confusion of the tax code.

Q: After you collected the obvious, then what?

A: We took that information and took it one step further. We went and solicited the brightest minds in the country. Namely, we talked to the head of the Harvard Economic School, Dale Jorgenson. We went out to Stanford, MIT, Chicago. We took the best and the brightest in economics, and we said, "This is the focus group research that we've done. This is what America wants. What do we have to do to restructure and reform in order to make this tax code work?"

They came back unanimously and said, "This is a tax on consumption, not on income." You would have to tax what people take from the economy instead of what they did for the economy through their work.

Q: I need to make a distinction here. Although I don't remember their name, there was an outfit out there that was peddling a 1 percent tax, but it was really a value added tax. It was tacked on at every level as a product moved through the manufacturing, distribution and sales process. I really didn't like that.

A: No, no. And that is exactly what we were trying to avoid, because then you end up with what you have today, which is imbedded tax. You end up not knowing exactly how much a product costs because there are all these embedded taxes. That's what people don't understand. One of the things we found out in our research is that corporations don't pay taxes; people do. Under an income tax, you have businesses pay tax, which they shouldn't be doing. You don't want them to do that under a consumption tax. [Now] people pay the income tax and they also pay the corporate tax. So what happens when a product gets created? Exactly what you just talked about. It's like a VAT (value added tax). That's exactly what income taxation does.

Q: How so?

A: The prices of products and goods are about 20 to 30 percent larger than they would need to be. When a corporation creates a product -- let's say it's 10 bucks -- they need to make a dollar profit to be competitive. They're going to charge $11 for that product. If it costs them $10 to create it and there's a dollar in tax they have to pay, they are going to charge you $12 in order to continue to make their dollar. We found through this research that once we actually extrapolated what that embedded tax was, depending on the item, it was anywhere from 20 to 30 percent.

Q: Here's where I have a problem with you guys. And it's multi-phased. First off, I know that your plan and others are designed to provide the exact same amount of revenue to the government to basically overcome the political objections. So, you provide the same amount of money, which, frankly, I think is too much.

A: Yes.

Q: Secondly, the level of this retail sales tax. When I first spoke with your people, it was around 17 percent, and I thought it was too high then. I've heard some people suggest it might be done for 10 percent. Now you're up to what, 23 percent?

A: Yes, 23 percent. That's how big the government is.

Q: Unless it is mitigated by some significant corresponding reduction in cost, I think we're still getting hosed. It's one thing if you pay an extra 10 or 20 percent when you buy a suit or a pair of shoes. But when you start buying cars or houses and you spend 300 grand and have to tack another 23 percent on top of that -- OUCH!

A: Actually, when you start talking about the larger items -- and I'm glad you brought it up -- that's where you start getting closer to the 30 percent range of embedded cost. We have actually recently, probably since the last time we talked to you, received an official endorsement from the American General Contractors Association. In talking with their board and talking with their tax specialists, they began realizing the competitive nature that they are going to be able to have and the increased number of home sales. Contracting businesses are going to be able to have greater success and obviously benefit from the boom that is going to come from the economy. They are behind this kind of movement.

Q: But there is a big "what if" here -- if all the other costs are reduced so that ultimately it is grossing out to about the same. But if you say you're just going to tack another 23 percent on top of the way things are now, you're not going to see that increase in home sales because people are not going to be able to afford it.

A: Actually they will.

Q: How?

A: Here's why. Two things happen simultaneously. Number one, you repeal all the embedded costs out of that home. So, the home price is actually going to drop when competition kicks in. And then, secondly, you're going to have 100 percent purchasing power. Remember, when somebody is trying to purchase a home today, they are going to be trying to purchase a home with after-tax dollars, which has lessened their purchasing power considerably. Let's just take a family of four, for example. The guy is self-employed with a single income, bringing in the funds for the entire family. He's making $44,000 a year. Under the income tax, in the 28 percent bracket with the payroll tax, he's paying 44.1 percent. Under sales tax, that same guy that's making $44,000 a year is only going to pay 11.5 percent.

Q: How do you get that?

A: The reason is that under this tax plan, one of the provisions we took into account was that -- especially at the lower income or the lower brackets -- individuals need to be able to pay for necessities. So, we offset the tax consequences with a rebate at the beginning of the month to make sure that people wouldn't be paying tax on the basic living necessities. When you start talking about a 23 percent rate, not only are you going to have your full buying power for those individuals that are at the bottom of the spectrum, but they're going to have 100 percent of their paycheck and lower prices at the register, even with the big-ticket items.

Q: There used to be a cut-off point for those people who would basically not have to pay tax. How would they get rebated for what they are buying?

A: A valid Social Security card tells you that at the beginning of each month -- and there's no means testing; there is no definition of income -- anyone in the country using the family of four as an example would not pay tax on expenditures up to the poverty level as defined by Health and Human Services. So, they would receive a rebate at the beginning of the month. That way, you're not creating another whole lobby to argue about what is considered exempt and what isn't -- mink coats aren't exempt but regular coats are, for example.

Q: There are a few things I have always liked about this concept. First, it is nondiscriminatory, and secondly -- and this I really think is one of the biggest benefits of the concept that nobody can yet quantify -- all those folks right now who don't pay taxes will pay -- the really super-wealthy people with lawyers and CPAs on retainer so they don't pay anything despite making big six-figure incomes, and all the people in the underground economy, the drug dealers and other bad guys. Every time those people buy something, they would pay tax. There is no way of yet knowing how much of a windfall that is going to generate, is there?

A: Yes and no. In the sense there are a lot of people out there consuming that we don't know about -- that's for sure. But we do have at least general numbers from the national income product accounts that show generally what consumption is in the country. We do know that when you look at the income base versus consumption, there is a serious problem, because as long as we've kept the numbers, consumption is about 20 percent higher than income is as a dollar figure.

Q: That ought to raise somebody's eyebrows.

A: There is obviously underreporting and no reporting going on as far as income is concerned.

Q: It doesn't bother me that you don't tax someone like a Bill Gates, but if he wants to go out and buy a $600,000 toy to sit in his front yard, fine -- let him.

A: That's exactly right. You're in a situation today where those items obviously are being paid for through an entertainment expense through the corporation, and you're paying for it in the higher prices of products, goods and services anyway.

Q: I always thought it was brain flatulence on the part of whoever came up with that so-called "luxury tax." I remember when they introduced that it was a 10 percent added tax on anything over a certain price. It put a whole lot of middle-class people who made luxury yachts out of business.

A: That's exactly right. When they start talking "targeted" tax cuts, it always scares me, because it seems we have enough of a target on our backs as it is. I don't think people sometimes realize how pervasive it has gotten. If we put our tax forms end to end to end to end this year, it would actually wrap around the earth 28 times.

Q: Five or six years ago when we were talking about this, it was some kind of wacko right-wing craziness. Now all of a sudden there was an actual bill introduced in Congress, and I suspect it will be back again. And for the first time, you have a treasury secretary who is not only amenable to the idea of replacing the income tax but actually likes your idea.

A: That's right. As a matter of fact, the Dow Jones Wire came out and reported that some of Bush's senior economic advisers have said, "His tax cuts are actually a step toward eliminating the income tax and moving toward some kind of tax on consumption." So to have those kinds of strong words coming out of the administration -- like you said, five or six years ago, it was considered wacky. Just recently, The Economist magazine out of London did a survey of American economists, some of the brightest minds, all the economists who have recently sat on the review board for the American Economic Review. During the campaign, they asked them to rate the Bush and Gore tax plans. They threw in a question asking, "What do you think about America moving to a federal sales tax?" which was just arbitrary.

Q: What did they say?

A: A plurality of economists said yeah. That's what should happen. Only 35 percent said we should stay with the current system. Now when people are starting to study it and research it, they say yeah, that's the right way to go. It's just a matter of getting the political machinery to make it happen.

Q: Frankly, the only people who would get burned by this, as I see it, are all the bureaucrats that work for the infernal revenue service. They're going to have to get a gig.

A: It's very true. But it's so evident of the American compassion that that actually came up in our focus groups, and people asked us, "What about the people who work for the IRS?" It's funny to think that that organization is five times the size of the CIA. It is just enormous. It's been estimated that it costs about $250 billion a year to comply with the code and it costs $8 billion a year to run the IRS. If you had eight bucks in one hand and 250 in the other and someone said you could take either the 250 or the eight with no strings attached, you'd grab the 250. So we say with that $8 billion, do a one-time course in retraining for all of them. Send them all to get a degree, or heck, retire them all to the Bahamas, and then we wouldn't have to deal with it.

Q: One of the criticisms I have heard is from some retailers who take great umbrage at the concept that they would be pressed into service as tax collectors. How would this national retail sales tax be collected, and how would it be transmitted to the Treasury?

A: [Nearly all] of the states and retailers collect a sales tax now in their local areas, so it wouldn't be any additional burden. It would be just another line item on a sales receipt. Yes, they would be collecting tax but not any differently than they are today. The states would actually be responsible for collecting it and then remitting it to the Treasury.

Q: I've got a couple of frequently asked quickies for you.

A: Sure.

Q: If your tax were to be introduced, would it cause prices to rise?

A: No.

Q: Would it decrease the revenue to the government?

A: No.

Q: Well, that's one thing wrong with it right there. Would it unfairly burden the poor or the elderly?

A: No. As a matter of fact, it would help.

Q: Would it unfairly burden retailers?

A: No. It would just be a line on the receipt no different than they are doing today.

Q: Would there be any kind of tax loophole at all?

A: ZERO! Isn't that refreshing.

Q: Finally, and one of the thing that has bothered me about this concept, this is not a value added tax, is it?

A: No, not in any way, shape or form. As a matter of fact, we believe -- and we know from our research -- that that is what the income tax is today.

Q: The current proposed rate is 23 percent. You claim that apparently high percentage is mitigated. Please explain again to our readers how this tax is not going to sting as much as what we have now?

A: The embedded cost of the Internal Revenue Service exists in the price of every product that you buy.

Q: You keep using that term. What do you mean by "embedded"?

A: Essentially, if I'm making a loaf of bread and that bread has to go down a production line, as an employer, I'm having to pay payroll tax on all my employees, and then I'm having to pay the payroll tax on all the equipment I purchase. Then as I go on to the next stage of production when I wrap it, I have to pay payroll tax on all the wrapping materials.

Q: It's kind of like a government value added tax.

A: There you go! That's exactly what we're talking about with the income tax being like a value added tax. And that price has been estimated as it comes down the production line by the time it gets to you as anywhere from 20 to 30 percent, depending on the item. With 20 percent, that's usually the smaller items like groceries or clothing. It gets closer to the 30 percent range when you're talking about the larger items like a vehicle or a home.

Q: I know you folks are circulating a petition. How do people get one if they want it?

A: If you go to the website, we've got one there that you can download. Or shoot us an e-mail, and we'll get one to you. Or call us at 1-800-FAIRTAX. We've grown over the last year-and-a-half to be the largest taxpayer organization in the United States. We've got almost 400,000 members nationally and growing by the day.

Q: What kind of congressional support or opposition are you encountering? I noticed that the bill introduced was a bipartisan deal.

A: Yeah. We believe a couple of things. One being that a lot of people who are supporters of our effort have expressed the same interest, concern and input that you have about the size of government and what it takes to fund the government. The research and the polling that we have done has shown that first, we will actually have to repeal the income tax, put in a sales tax, and then we can begin to bring up the discussion about the size of government. Once you have a visible rate and people know what they are paying, it's amazing. You'll really start to feel the frustration from the American taxpayers, and we can start to address things like government waste.

Q: I still think the 23 percent tax rate is too much, but so be it. What if after a year of the implementation of this national retail sales tax there is a humongous surplus that comes in? What provisions are there for reducing the tax, because you know once government gets their hands on our money, they are not in any great big hurry to return it to us in any fashion.

A: If you look at the smaller communities or some states -- like Texas, for example, does not have an income tax. They run on a sales tax. Florida is the same way, New Hampshire. There are several states that run solely on a sales tax -- very successfully, I might add. In those states when they try to raise the rate by even a quarter of a percent, you just seem phenomenal feedback from taxpayers. When you see surplus situations, you see a forceful hand from local folks trying to get that tax rate down. So in surplus situations, instead of having the debate that we're having today about tax cuts and who's going to get them, it's a very simple thumbs up or thumbs down on the rate. It's a very easy thing to put your congressman in the position to do.

Q: Is there anything in the initial legislation proposed that provides for scaling it back if the surplus exceeds the budget by so much?

A: No, but I think it's a fantastic idea, and I think it's one that should be brought up in debate on the floor.

Q: I've got a procedural question for you. You note that you provide for an annualized rebate on expenditures up to the poverty level. How do you do that? If there is not a filing, how do you know?

A: By having a valid Social Security card.

Q: So what does that do?

A: For those individuals who have a valid Social Security card through the Social Security Administration, either by smart card ...

Q: Ow! Shame on you. By the way, several years ago, a worker at the California Franchise Tax Board told me that in some cases, under any given Social Security number they could have as many as 100 people filing.

A: That would definitely bring about some Social Security reform, wouldn't it?

Q: But aside from that problem, how do folks get the rebate? I don't understand.

A: The rebate comes to the household in the form of a check.

Q: But how do I prove to the government I only made 22 grand if you don't file an income return?

A: There is no means testing for it. In other words, it is for everybody. So even Bill Gates wouldn't be taxed on the first $22,000 worth of expenditures if he said he wanted the rebate. You simply send in the card that says, "Yes, I want the rebate," or "No, I don't want the rebate." Or you don't even have to send in the card if you don't want one.

Q: So everybody gets a rebate on the first 22 grand of income? Why even go through that exercise? Why not just lop it off and reduce the percentage rate of the tax?

A: How would you define what people's income is without having them file? How would you know what their income was? Then you would be compelled to do means testing and having to say these people would be exempt and these people would not.

Q: So every year, everybody gets a check?

A: Yep.

Q: Can you give a quickie thumbnail comparison of the flat tax compared to fair tax?

A: Sure. The sales tax would actually make the taxation of income unconstitutional. It would have no loopholes, no deductions, no exceptions, no exclusions, and everybody would pay exactly the same rate for final products with no tax on used products.

Q: Frankly, the left ought to like this since the wealthy people they constantly vilify are going to end up paying more taxes in the long run as they buy more stuff.

A: Yes, with the exception that you no longer have capital gains taxes, gift taxes and death taxes. That's where we have run into a little bit of opposition, because obviously, we don't tax savings and investments. It has proven to be detrimental to the economy, frankly. But under a flat income tax, it doesn't raise the revenue that would currently be "needed" to run the federal government. We feel you can't win both arguments at the same time. Secondly, it becomes a VAT in the sense that it continues to be added in the embedded cost of products. Lastly, you would still end up with a situation where you've got exceptions and exclusions, and that always turns into a scorpion and the frog situation.