Ready For A 23% Sales Tax?

It may sound weird. But the idea has some powerful backers

On Dec. 2, a Texas construction executive spent 80 minutes at the White House laying out his vision of a national sales tax to the President of the United States.

The private briefing, arranged by the executive's childhood friend, House Ways & Means Committee Chairman Bill Archer (R-Tex.), was a big step in a long-shot campaign to replace the federal income tax, the estate tax, and the Social Security and Medicare payroll taxes with a 23% consumption tax. Simply getting the idea on the Washington agenda is a hugely ambitious goal.

But the businessman who got the President's ear, Leo E. Linbeck Jr., owner of the influential Linbeck Construction Co. in Houston, is determined. With a handful of other Houston businessmen, notably Enron Corp. Chief Executive Kenneth L. Lay and Cogen Technologies Inc. Chairman and CEO Robert C. McNair, Linbeck founded Americans for Fair Taxation, or AFT, in May, 1995. In recent months, heavy hitters from around the country have signed on, including NationsBank Corp. Chairman Hugh L. McColl Jr.

REBATE. Now, AFT is about to kick off a multimillion-dollar grassroots marketing campaign to sell its plan to the public. Linbeck, a former chairman of the Federal Reserve Bank of Dallas, declined BUSINESS WEEK's request for an interview, trying to avoid any personal attention. But AFT Executive Director Grover G. Jackson says, "We're going at it as if it were a business project that's market-driven. We have tested it, refined it, and now the task is to roll it out to see if it resonates." The group has already spent nearly $4 million on academic and market research.

AFT's proposal is simple but audacious. The 23% tax would be imposed on all goods and services. There would be no exceptions for food, medicine, or education. Only used goods, such as homes and cars, would be exempt.

In part to relieve the burden on the poor, who would spend a greater share of what they earn, the AFT would include a monthly rebate for all families, regardless of income, to offset taxes on basic necessities. The rebate would vary by family size, and a family of four would receive $308 a month. That, along with the abolition of the highly regressive payroll tax, would reduce overall taxes on the working poor, AFT claims.

Even before it is unveiled, the plan has attracted critics from both left and right. They argue it is unrealistic to expect the U.S. to adopt a tax system that no other nation has ever tried. Consumers will never accept combined state and federal sales tax rates that could easily top 30%, they insist. And some economists worry that high rates will produce more cheating.

FALLS SHORT? The AFT says its plan will boost economic growth without raising prices. The reasoning: The underlying cost of goods and services will drop as business taxes now built into prices are repealed. While the AFT insists the 23% tax will raise the same amount of revenue as the current taxes, critics don't believe it. "The numbers just don't add up," says Brookings Institution tax economist William G. Gale.

But none of this has slowed AFT. The group has retained both Democratic and Republican pollsters and scholars such as Harvard University economics professor Dale Jorgenson. In January, AFT hopes to kick off a national media campaign that could cost at least $10 million. TV, radio, and direct mail will all be geared to selling the sales tax concept to the public.

AFT's blitz promises to track the strategy Linbeck used to win tort reform passage in the Texas legislature. In that campaign, Linbeck linked heavy campaign contributions with grassroots pressure and backroom arm-twisting to turn votes.

Can a group of business executives use savvy marketing to rewrite the U.S. tax code? It sounds quixotic at best. Clinton wasn't making any promises after the White House meeting and many Republicans prefer a flat income tax to AFT's sales tax. But Linbeck & Co. already have energy, money, and some powerful connections in Washington. While Archer won't embrace the group's specific plan, he leans heavily toward the sales tax and can be expected to push for one over the next few years.

It's hard to imagine Congress adopting the AFT plan. But don't be surprised if the sales tax gets lots of attention in the coming year--and even changes the way Americans look at their tax system.

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