San Diego Magazine / August 2005 / Tax Revolt

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Tax Revolt

LEO HAMEL WANTS TO ABOLISH the Internal Revenue Service and ignite the nation’s economy. And he’s not just talking about it. He’s living it. Hamel, who owns Leo Hamel & Co. Fine Jewelry, is so fervent in his belief that the United States needs a total overhaul of its tax system that he has turned over operation of his $12 million business to his partner and his wife, while he focuses on tax reform.

Four years ago, he reached the boiling point with the federal income tax system, which he says punishes entrepreneurs like him. He toyed with moving to South Africa, where his wife is a citizen. “But that would be running away. I would rather fix it,” says Hamel, who started his business out of a briefcase in 1981. To that end, he’s committed to working full-time through the 2012 national elections to get the Fair Tax Act passed. “I’ve dedicated the next seven years of my life to it,” he says.

Hamel is confident of success because, unlike other hot-button issues, this is not divisive, he says. “Abortion, gay marriage, prayer in schools, stem cell research—these are divisive issues. But getting rid of the IRS appeals to almost everyone. That unites people,” Hamel says.

Under the Fair Tax Act, no one would pay income tax. The bill eliminates personal and corporate income taxes, payroll and self-employment taxes, capital-gains taxes, alternative minimum taxes, gift and estate taxes. These would be replaced by a single-rate sales tax paid at the point of purchase on new items, including homes. There would be no tax on used or secondhand items. Although a constitutional amendment is not required to abolish the IRS, a provision in the bill calls for repealing the 16th Amendment so Congress cannot impose an income tax again.

“This makes every penny of the tax visible, and taxpayers will have a choice,” Hamel says. “If they don’t want to pay as much in taxes, they consume less, and save or invest the rest.”

To ensure no one pays a tax on basic necessities, the Fair Tax bill calls for a prepaid, monthly rebate—or “prebate”—for every registered household. All valid Social Security cardholders who are U.S. residents— including Bill Gates—would receive a monthly rebate equivalent to the tax paid on essential goods and services up to the poverty level. For example, in 2004, the poverty level was roughly $19,000 for a couple with two children under 18. Thus, any family this size, regardless of income, would receive a rebate of about $475 each month to cover their estimated taxes on necessities.

Hamel contends it’s infinitesimally simpler than the current federal tax code, which amasses annual tax returns that, if set end-to-end, would circle the Earth 28 times. “You pay one tax, and there’s no paperwork,” he says.

Instead of filing complex income tax returns every year, households would file a single form detailing their members, and retail businesses would file a simple form showing the amount of tax due on goods sold. As an enticement for retailers to support the bill, these businesses would receive a rebate of one-quarter of 1 percent of the taxes collected.

THE BIPARTISAN MEASURE, HR-25, was introduced in the 1990s by U.S. Representative John Linder (R-Georgia) and Collin Peterson (D-Minnesota), then reintroduced in 2003. Senator Saxby Chambliss (R-Georgia) introduced a companion bill, S-25, in the U.S. Senate. However, the measure languished in Congress amid lackluster support until President George Bush convened a tax advisory panel in January, breathing new life into the bill.

The panel is charged with identifying tax reform options that are revenue-neutral and reduce the costs and administrative burdens of compliance, share the burdens and benefits of the federal tax structure in a progressive manner and promote longterm economic growth and job creation. The panel’s recommendation is to be submitted to the Secretary of the Treasury in September.

Hamel and his fellow advocates at the Houston-based Americans for Fair Taxation (AFT) contend the Fair Tax Act meets all these requirements. The economic boom they tout would be sparked by eliminating 95 percent of the $250 billion (some estimates go as high as $700 billion) spent complying with the current tax code, as well as the $10 billion budgeted annually for the IRS. Instead of producing mountains of paperwork for a bloated government bureaucracy, that money could go toward producing goods and services for the global economy, they say.

Professional number crunchers tend to agree—75 prominent economists sent a letter to the panel in support of the Fair Tax Act. A consumption tax, unlike an income tax, doesn’t force companies offshore, says economist Todd Buchholz, author of Bringing the Jobs Home and a former adviser to President Bush. The complexity of the current tax code favors businesses and industries that can afford to lobby members of Congress to obtain favorable provisions in the code, he says.

That’s why “the Fair Tax initiative is opposed by the ‘Gucci Gulch,’ the lobbyists who know the tax code and how to take advantage of loopholes for their clients,” Buchholz says. “They would lose those tax breaks —and their purpose—and have to get real jobs.”

Hamel likens the Fair Tax movement to a religion, with its proponents displaying evangelical- type enthusiasm. But he may need the patience of Job to see his seven-year campaign through to the end. Congress is already being lobbied by the measure’s opponents, including retailers and homebuilders, who claim it will hurt the economy short term. Only three members of California’s Congressional delegation have come out in favor of the bill, none from San Diego.

The AFT believes Bush has the clout to push the bill through Congress before his term expires in 2008. Hamel, however, doesn’t trust the current crop of Democrats or Republicans to get it done. His solution is to replace them with elected officials who support the tax. If he achieves his goal, by 2012 he will have an office in every Congressional district in the country supporting Fair Tax candidates. Although Hamel is a conservative, he doesn’t care if the candidates are Republican or Democrat, as long as they support the Fair Tax Act.

“I intend to have thousands of people in our group working full-time within four years,” Hamel says. He has established an on-line training course accessible through his Web site (fairtax.net) to train fund-raisers across the country. He believes he can raise as much as $2 million per district from individuals and small businesses. The National Small Business Association supports the bill.

The bitter pill in the Fair Tax plan is its 30 percent sales tax. “A consumption tax is not the answer,” says Rachelle Bernstein, vice president of the National Retail Federation (NRF). “Americans whose jobs depend on consumer spending can’t afford to take that risk.”

Fair Tax advocates argue that by eliminating the income tax, the effective tax rate is 23 percent—about what most Americans pay under the current system. And even if growth in consumption falls in the first year, as predicted in a study done for the NRF, retailers will reap more after-tax profit because of the repeal of the income tax and lower compliance costs, they say.

“There is no negative,” Hamel insists. “Foreign trade will improve because the price of U.S. goods will fall, and it will make the United States a tax haven, with money flowing into our economy instead of overseas.”

All that’s needed to make it happen, he says, is for the citizenry to overcome its apathy and jump on the Fair Tax bandwagon. “We could change this country, and it saves us money. It’s the patriotic thing to do.”

© 2006 San Diego Magazine