By Camilo Smith
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In his quest to demolish the income tax, Archer is backed by a grassroots movement that includes such lobbying groups as Citizens for an Alternative Tax System, which grew out of a fight over the tax code. Established in California in 1990, CATS was initially an offshoot of Scientology. California Scientologists had long insisted that their organization was a church, and as such shouldn't have to pay taxes. When the IRS disagreed and pushed for money, some Scientologists took the issue to court. Others decided to take their battle into politics. Though the IRS ended up granting Scientology tax-exempt status in 1993, CATS continued on, broadening from its original base to include a variety of people disgruntled with the tax code for a variety of reasons. If CATS has outgrown its Scientology connections, it hasn't outgrown its fervor for reform. It claims 20,000 members nationally, with its most active chapters in Los Angeles, Atlanta and Houston.
The Houston chapter has grown from a handful of members last year to 350 active members and 2,500 supporters, says its president, Yvonne Schick. At the end of February, a crowd of 200 came to the monthly meeting at the Hess Building on Buffalo Speedway to watch a video about a national retail sales tax and hear economist David Smith discuss the history of the income tax, which he described as "Prohibition's Hangover." Although the U.S. had experimented with the income tax during the Civil War, Smith recounted, it was reviled and repealed, and, in 1893, the Supreme Court declared such taxes unconstitutional. Still, by the turn of the century, Smith said, the progressive/populist movement was pushing prohibition, but there was a catch: as much as 40 percent of the nation's income was based on the excise tax on liquor. Before Prohibition could be passed, an alternative tax system was needed, and so progressives pushed for what, in 1913, was ratified as the 16th Amendment, giving Congress the "power to lay and collect taxes on income." The first income tax was also intended to get at the rich, who were taxed at rates that now seem quaint: 7 percent on income more than $1 million. Those with incomes less than $2,000 were taxed at a rate of 1 percent.
From that, Smith told the CATS crowd, has evolved a system of taxation that violates five other amendments to the Constitution, among them the right to a trial by jury, prohibitions against excessive fines and limitations on search and seizure. (As it happens, this is not an argument the Supreme Court has so far supported.) Still, rhetoric aside, almost everyone has heard a tax horror story. Archer likes to point out that each year, 40 million Americans suffer some sort of inquiry into their tax returns. A straight tax on consumption, he insists, would simply end all the uncertainty.
While big business has yet to weigh in on his tax proposals, Archer has lined up some important help from a few hometown boys who made good. One of them is Jack Trotter, a wealthy investor who went to the University of Texas with Archer, and whose father was Archer's father's accountant. A CPA and a lawyer, Trotter has acquired a reputation both as a dealmaker and investment adviser, and his touch is said to be golden. He became very good at creating deals that protected investors from tax liabilities, but grew increasingly disgusted with tax laws that allowed him to pay less tax than his secretary. Eventually, he became obsessed with replacing the income tax with a sales tax.
In 1992, Trotter was put in touch with Steven Hayes, the founder of CATS, and Trotter began to realize that there might be grassroots support for his dream. He enlisted several friends and created the National Tax Research Committee to raise research funds to study the issue. Among the members are developer Howard Horne of Cushman and Wakefield and Jack Valenti, a prominent Democrat and CEO of the Motion Picture Association of America. According to its president, a retired investment adviser named James Reichert, the NTRC plans to raise a million dollars for academic research on the economic implications of a national sales tax. Some of that grant money will go to economists at the Baker Institute at Rice University, where Trotter serves on the Board of Governors. In addition, Trotter's longtime friend and associate Leo Linbeck Jr., chairman of Linbeck Construction Corporation, is leading fundraising for a lobbying and advocacy campaign on behalf of a national sales tax.
Archer has also received support in principle from what some might consider an improbable corner. Well-known liberal Democrat Barney Frank of Massachusetts has weighed in as favoring a consumption tax, saying he's convinced such a levy can be designed to exempt the poorest Americans from paying an unfair share. The costs of making the transition to a different form of taxation are likely to be tremendous, Frank says, "but I like it in terms of excluding savings from taxes and building foreign investment and exports."
But leading a tax revolution isn't going to be simple. One reason the income tax code is so complex is that it's been repeatedly amended to appeal to different constituencies. When push comes to shove, some people may find that they like the IRS more than they thought. After all, businesses get to write off health care, depreciation and debt; home and family values are supported by home mortgage and childcare deductions; and certain charities depend on tax breaks as much as they do good will to solicit contributions. Indeed, a few years back, when the IRS proposed reducing a tax write-off people could take for giving works of art to museums, curators nationwide went into a panic. If the rich got no benefit other than a bronze plaque for turning over their art, then they might just keep it, the complaint went. It's easy to see similar wells of concern rising up when people consider just what else might disappear with the IRS. Taxation is more than simply a way to raise money; it's also a way to encourage particular activities. Want industries to stop polluting? You can threaten them with the stick of fines, or the carrot of tax breaks for cleaning up their act. "These are ideals that are embedded in our tax code," says a Democratic Ways and Means staff member, who predicts plenty of opposition once Archer settles on a definitive plan.