Debt Free America Act Would Switch U.S. from Income Tax to Consumption Tax

Rep. Chaka Fattah, a Pennsylvania Democrat, has introduced a bill — the Debt Free America Act — in every Congress since at least 2004 that would convert the United States’ primary source of tax revenue from income to consumption — which is the tax system deployed by most industrialized economies. Rep. Fattah says the switch would “wipe out the national debt within seven years and then fund the federal government while abolishing personal income taxes.”

Here’s how he describes the system:

Under the Debt Free America Act, the 1 percent fee on transactions in the United States would be directed to eliminating America’s national debt that existed on January 20, 2009 — about $10 trillion — and reducing the deficit. Once that debt is paid off, over the next seven years, the fee’s proceeds would be directed to broad-based tax reform to include elimination of personal income taxes.

Taxpayers earning $125,000 (or $250,000 for those filing jointly) would receive a year’s-end 1 percent credit on their income, eliminating the impact of the transaction fee on middle class and low income Americans. In addition, my bill provides statutory authority for the Bipartisan Task Force for Responsible Fiscal Action to control and limit federal spending, recently established by President Obama by executive order.

An analysis in the Fair Tax Blog last year was generally positive:

Theoretically, everyone would pay one cent on the dollar for every such transaction in America every day — whether $3 million on a $300 million business acquisition, $300 on the purchase of a $30,000 car, or $5 on a $500 ATM withdrawal.

To reduce the impact of such a flat tax on the poor, Fattah’s bill provides for a 1 percent tax credit for couples earning $250,000 or less ($125,000 or less for individuals) and discretion by the Treasury Department to exempt certain transactions on which lower-income people disproportionately rely. Another idea would be to amend his bill to exempt all transactions below $500.

Using 2008 numbers as an example: There was $755 trillion in total transactions that year. If you deduct the exempted $312 million in stock transactions, that leaves $443 trillion as the tax base, minus the cost of the tax credit and other possible measures to soften the impact on the poor.

So far, the Republicans who control the House have refused to allow debate on the Debt Free America Act.

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