Nick Smith, November 07, 2004

The voters have spoken, but what does it mean? The reelection of the President and majorities in the House of Representatives and Senate in effect puts the ball in the Republican court. With the beginning of the invasion in Fallujah, there is a determination to quell the terrorists and proceed with the January election. Also challenging is where we will go on domestic policy. I think there will likely be a push on two issues that I’ve been working on in Congress my entire career: fundamental tax reform and Social Security reform. It will be interesting to see what happens in these areas over the next four years.

There seems to be broad bipartisan agreement that our current tax system is unnecessarily burdensome and complex, onerous to administer, and unfair to the majority of taxpayers who don’t have the money to hire the accountants and lawyers to take advantage of its numerous special interest loopholes. People disagree, however, on what to replace it with. I’ve been a pioneer in promoting the flat tax as the prime sponsor of the flat tax bill (H.R. 3060) now before Congress. It is a vastly simplified income tax that maintains collection practices we’re all familiar with. The flat tax encourages savings and investment, significantly reduces tax compliance costs that are now estimated to exceed the taxes themselves. It also reassures taxpayers that everyone pays under the same rules.

Others are backing a sales tax. It is a proposal far better than the current tax system, and I have also cosponsored it. However, an expanded sales tax poses serious implementation problems that the flat tax does not. It requires a constitutional amendment to abolish the present income tax. This means it needs 2/3 support in Congress and 3/4 of the states to ratify it. Without that, we run the risk of having a sales tax in addition to the income tax. The sales tax assumes that states will collect federal taxes. But the federal sales tax would be far broader than any state sales tax, now written to cover services, foodstuffs, medicine, etc. This would burden states with additional enforcement responsibilities, which they would be unlikely to do without substantial reimbursement from the federal government. Enforcement is important because the risk of tax evasion, which already occurs under Michigan’s 6% tax, would be even greater under a federal tax of 23% or more. Finally, implementing a sales tax would require an overhaul of Social Security, because benefits are now based on how much you’ve paid in payroll taxes. Without that payroll tax information, we’d need new benefit formulas for Social Security.

The President’s second big initiative is adding worker-owned accounts to Social Security. My Social Security reform bill (H.R. 3055) would do that while restoring the program’s solvency according to Social Security Administration actuaries. Social Security is failing because there are fewer workers paying into the program to support an increasing number of retirees. In 1950, there were 17 workers for each retiree. Because of lower birthrates and longer life spans, there are now just three workers per retiree, and it is expected to fall to two workers by 2030. Worker-owned accounts can be managed safely, will give people ownership and some increased control over their retirement funds, and can be designed to avoid changing any benefits for current and near-term retirees.

I’ve written to the White House urging that the President exert leadership on these two issues of reforming the tax code and Social Security. I enclosed my legislation, suggesting it be a starting point. There are tremendous economic advantages to pursuing both of these initiatives. Hopefully we will move ahead on them in the first year of the new Administration.

Congressman Nick Smith, a Republican, represents Michigan's 7th Congressional District, which includes Battle Creek and the counties of Branch, Eaton, Hillsdale, Jackson, Lenawee, Calhoun, and Washtenaw in south-central Michigan.