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Fattah Courts Both Parties on Tax Plan

Can Rep. Chaka Fattah (D-Pa.) once again make Democrats a player in tax reform? The fifth-term Philadelphian has wagered a year of his career on the proposition.

Though Fattah ranks among the House’s most liberal Members, his proposal to substantially overhaul the tax system has attracted interest from left and right alike — even from President Bush’s Treasury Department.

Fattah proposes that the federal government scrap the entire tax system, including personal income taxes, corporate-profits taxes and payroll taxes, and institute a universal tax on transactions.

“There are trillions of transactions in our economy,” Fattah notes. “Other than breathing, it’s the one thing that Americans do the most.”

In its simplicity, Fattah likens a tax on transactions to the fee paid at an ATM machine: A $100 withdrawal is actually a $101.50 withdrawal, after the fee is applied.

Democrats haven’t been major players in tax reform since the mid-1980s, when Sen. Bill Bradley (D-N.J.), worked with Republicans to help simplify the tax code and eliminate loopholes. Then-Rep. Leon Panetta (D-Calif.) also backed one of the first proposals for a flat income tax, and Rep. Richard Gephardt (D-Mo.) during his 1988 presidential run made a “two-tiered” flat tax, with a bottom rate of 10 percent, a centerpiece of his economic policy.

But since the mid-1990s — the last time that structural tax reform received significant Congressional attention — it’s been mostly Republicans who took up the tax-reform banner, with many Democrats charging that changing the tax system could become a giveaway to wealthy Americans

The two leading proposals of the mid-1990s were a national sales tax and a “flat tax” that assessed all income at the same rate. The sales tax won the backing of Sen. Dick Lugar (R-Ind.) and Rep. Billy Tauzin (R-La.), while the flat tax was a favorite of then-House Majority Leader Dick Armey (R-Texas) and magazine scion and former presidential candidate Steve Forbes.

Fattah is seeking to change the dynamics of the debate. In his view, establishing a national sales tax without doing harm to the U.S. Treasury would require high rates that would disproportionately (if indirectly) fall on the poor.

By contrast, a transaction fee would be applied so widely that its rate could be kept much lower and thus work more equitably. For purposes of debate, Fattah suggests a 1 percent surcharge on every transaction, meaning a penny on each dollar spent.

But the lawmaker stresses that the chief virtue of his plan is that it would replace the current one, which Fattah (and others) describe as ridiculously complex, rife with evasion and harmful to the economy.

“It’s like a boat where there are more and more holes, taking in more and more water,” Fattah said of the current system.

Cassandra Butts — a one-time aide to Gephardt when he was House Minority Leader and now a senior vice president for economic policy at the Center for American Progress, a liberal think tank — praised Fattah’s attempt to take back the tax-reform issue for the Democrats.

“Rep. Fattah is a progressive, and he is motivated by a desire to promote fairness in the tax code and a desire to ensure that the government has the resources needed to fund critical national priorities,” Butts said. “I would welcome a discussion on a more progressive tax policy, and I think that’s what Fattah is trying to do here.”

Yet Fattah’s call also resonates with key Republicans. House Majority Leader Tom DeLay (R-Texas) has already indicated that tax reform and simplification will be at the top of the GOP agenda in the next Congress.

And the faith that Fattah’s plan places in market mechanisms makes it appealing to conservatives who believe the current tax system imposes onerous burdens on business.

Rather than chasing down tax cheats, the Internal Revenue Service would be reprogrammed to ferret out waste, fraud and abuse, Fattah says.

Fattah has already approached key GOP lawmakers — including Rep. Jim DeMint (R-S.C.), who has proposed the creation of a tax commission, and John Linder (R-Ga.) — in an effort to jump-start the debate. He says he also has spoken briefly with Armey, who remains influential among free-market conservatives.

In fact, there are few places Fattah hasn’t gone to for support, debate or analysis. The lawmaker says that Robert Carroll, the assistant secretary for tax policy at Treasury, pledged in a recent meeting to study the transaction fee. And Douglas Holtz-Eakin, the director of the Congressional Budget Office, is working up some analyses to compare Fattah’s idea with other reform proposals. The lawmaker has sent the plan to President Bush, to the country’s Nobel Prize-winning economists and to the deans of the top 100 business schools.

“We’re not trying to narrow-cast this,” Fattah says. “If it’s not a good idea, we want to know that, too.”

The Congressional Research Service has weighed in. Analyzing the proposal for one senior Democrat who has expressed interest, the agency said the transaction fee could bring in greater revenue while greatly simplifying the system, eliminating onerous “distortions” in the marketplace and reducing compliance costs, which are now about $100 billion to $200 billion annually, according to CRS.

On the other hand, CRS said, the transaction fee may create new problems and distortions. For instance, it would almost by definition impose its greatest burden on industries that involve the largest numbers of transactions. In the financial arena, it could cut sharply into trading volume and shift business to markets abroad.

Other sources have raised possible red flags. Economists on both the right and left have cited the potential for a “pyramiding effect,” in which fee upon fee is imposed on an item as manufacturers and distributors buy and sell it several times before it reaches the consumer.

The principal difference between Fattah’s proposal and the value-added tax — or VAT — commonly used in European countries is that the VAT is levied solely on the final sale to the consumer and is only imposed on a portion of the value of that transaction. Fattah’s plan would impose a tax every time the product moves one step closer to its final sale.

Fattah has devoted a significant portion of his Congressional Web site to the proposal, which he has dubbed the “Transform America Transaction Fee.” The lawmaker indicates that his requests for feedback from anyone interested in the proposal have yielded some useful suggestions and considerations, such as whether deposits in savings accounts should be taxed like all other transactions.

For his own part, Fattah suggests that transactions under $500 should be exempt from the fee — a means of sparing the poorest Americans from the burden of taxation — though many economists say that establishing that exemption could leave an opening for abuse.

“Transform America” refers back, indirectly, to the roots of Fattah’s interest in tax reform. A dedicated advocate of educational equity, Fattah has long been dismayed by the public school system’s reliance on state and local property taxes, which inevitably directs the greatest resources to schools in the wealthiest areas.

“I came to believe you could not kind of tweak the system around one specific issue,” Fattah says, reflecting on his years of efforts to eliminate the disparities. “I needed to take a broader approach — tax reform.”

What Fattah decided, essentially, is that property taxes needed to be eliminated as the key determinant of how well one school is financed as opposed to another.

The solution, Fattah concluded, was that the federal government needed to put down a stake in education that would encourage states to lessen that dependence — or eliminate property taxes altogether.

As Fattah envisions it, excess revenue generated by the transaction fee would be used to cover 50 percent of total state and local expenditures for public elementary, secondary and post-secondary schooling. In fact, Fattah appears to regard the fee as something of a silver bullet, able to make the tax system simple and more equitable, while producing mountains of new revenue for public and private investment.

He believes that his plan could make reasonably short work of the $7 trillion national debt.

The plan is too new to have attracted much formal interest by Democrats. But Fattah is betting that many of his Democratic colleagues will warm to the idea once they realize it can be done equitably and perhaps provide sufficient revenue to fund the party’s entitlement-rich agenda.

“With the broadest possible base, you get the lowest possible rate,” Fattah says. “I don’t think anybody can beat that.”

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