A Comprehensive Plan to Shrink the Government and Grow the Economy
Congressman Dick Armey
Senator Richard Shelby
July 1995
Why We Need the Freedom and Fairness Restoration Act
Our government is too big, and it spends, taxes, and regulates too much. This is the
central crisis facing America today. Consider ...
More Americans work for government than are employed in manufacturing.
The U.S. public sector is now larger than the entire economy of any country in the
world except Japan and the United States itself.
The average American family pays more in taxes than it spends on food, clothing,
and shelter combined.
Every American works from January 1 to July 10, more than half the year, not to
support a family, but just to pay the costs of government taxes and regulation.
An Unfair Tax System
Perhaps the greatest ball-and-chain on America's freedom and prosperity is the income
tax. After eight decades of being "reformed," our tax system is so complex ...
Even the Internal Revenue Service can no longer give accurate advice on it.
The IRS sends out eight billion pages of forms and instructions each year. Laid end
to end, these would stretch 28 times the circumference of the earth.
Americans spend 5.4 billion man-hours each year calculating their taxes -- more
man-hours than it takes to build every car, truck and van produced in the United States.
The tax code puts a drag on our economy worth an estimated $232 billion a year in
compliance costs, an amount equal to $900 for every man, woman, and child in the
country.
A Fundamental Choice
Government has become America's number one growth industry -- and a danger to the
American Dream. As a nation, we face a fundamental choice: Should the government
become ever larger as our freedom diminishes? Or should we take dramatic action
now to halt the growth of government and restore greater freedom for our citizens?
The Freedom and Fairness Restoration Act says, Enough is enough. Its authors
believe ordinary Americans are better equipped to make their own financial decisions
than politicians and tax lobbyists in a far-off capital. More than a sweeping overhaul of
the tax code, the FFRA is a comprehensive assault on oversized government, designed
to halt its growth, expose its true cost, and limit its influence on the lives of free
Americans. It would radically reorder the tax and spending activities of the
government. Here's what it would mean for America:
1. Creates a Flat Tax
Simple. Replaces the current complicated tax system with a flat tax so simple
Americans can file their taxes on a form the size of a postcard.
Fair. Repeals special preferences in the tax code and is true to the uniquely
American definition of fairness: Everyone should be treated the same.
Pro-growth. Ends double taxation of saving, thus promoting investment and job
creation. Rewards work by lowering marginal tax rates. Creates a neutral tax
system which will liberate individuals to make financial decisions based on
common sense economics, not arcane tax rules.
Pro-family. Eliminates the marriage penalty. Effectively doubles the deduction
for dependent children. By ending the double taxation of savings, provides all
Americans with the tax equivalent of an unlimited Individual Retirement Account.
Pro-taxpayer. Protects taxpayers by requiring a supermajority of Congress to
raise the tax rate or add loopholes.
Paid for. Raises nearly as much money as the current tax system, while
providing the American people with a modest tax cut, paid for with spending
cuts.
2. Controls Spending
Sets rigid spending caps. Sets unbreachable caps on federal spending that will
ensure spending growth is limited and the federal budget reaches balance by
the year 2002.
Sunsets most programs. Genuinely reinvents government by ending the legal
authorization for most federal programs, thus requiring Congress to
fundamentally reexamine programs before spending taxpayer dollars on them.
The Freedom and Fairness Restoration Act
Bill Summary
History. The FFRA was introduced by Rep. Dick Armey of Texas on June 16, 1994,
and subsequently introduced in the 104th Congress by Congressman Armey and Sen.
Richard Shelby of Alabama on July 19, 1995. Copies of the bill, which is designated
H.R. __ in the House and S. __ in the Senate, may be obtained by calling the House
Document Room at (202) 225-3456. The bill is divided into two sections, called titles.
TITLE 1 -- A NEW, FAIR TAX SYSTEM
Replaces the income tax with a 17 percent flat tax
The bill repeals today's complicated income tax system in toto and replaces it
with a low, simple flat tax. Under the bill, every dollar of income in the economy
is taxed, with wage and pension income collected from individuals and all other
income collected from businesses. Individuals pay 17 percent of wage income
calculated on a return so simple it can fit on a postcard (see Form 1).
Businesses pay 17 percent of business income, calculated on an equally simple
return.
Individual Wage Tax. Individuals pay 17 percent of all wages, salaries, and
pensions, after subtracting family allowances. When fully phased in 1998, the
family allowances will be $11,350 for a single person, $22,700 for a married
couple filing jointly, and $5,300 for each dependent. These allowances are
indexed to inflation. The flat tax replaces the current income tax system, but not
Social Security and Medicare payroll taxes. Social Security benefits would not
be taxed.
Business Tax. All business income, whatever the source (corporate, partnership,
sole proprietor, professional, farm, and rental profits and royalties) is taxed at
the one low rate. Businesses pay 17 percent of the difference, if positive,
between revenues and expenses. Expenses are defined as purchases of goods
and services, capital equipment, structures, land, wages and contributions to
employee retirement plans. No deductions are permitted for fringe benefits,
interest, or payments to owners. Collecting business income earned by
individuals at its source -- the business -- allows for a simple, airtight system that
ensures all income in the economy is taxed.
Benefits of the flat tax.
Simplicity. Because the existing system's maze of exemptions, loopholes,
depreciation schedules, graduated rates, and targeted tax breaks is eliminated,
taxpayers will save countless hours and expense in filing their yearly tax returns.
The Tax Foundation, a Washington, D.C.-based nonprofit organization which
closely monitors federal tax policy, estimates the flat tax would reduce
compliance costs by 94 percent.
Fairness. The flat tax will restore fairness to the tax law by treating everyone
the same. No matter how much money you make, what kind of business you're
in, whether or not you have a lobbyist in Washington, you will be taxed at the
same rate as everyone else. While applying only the single rate to all income,
the flat tax is also progressive -- thanks to the generous family allowance. A
family of four earning $30,000 would pay no income tax, the same family earning
$50,000 would pay 6 percent, and the family earning $200,000 would pay 14
percent. The family allowances also take millions of lower-income taxpayers off
the tax rolls entirely.
Economic Growth. By eliminating the bias against saving, slashing marginal
tax rates, and allowing resources to seek their most efficient use, the bill will
spur productive investment and economic growth. If the bill passed this year, it
would increase the annual income of the typical American family by $4,300 by
2002.
Protects against higher deficits
The bill is carefully designed to safeguard taxpayers against higher deficits. In
the first year after enactment, the tax rate is set at 20 percent to provide modest
tax relief while limiting initial revenue loss. This initial tax cut is fully paid for with
cuts in federal spending. In the third year, the rate is lowered to 17 percent,
providing additional tax relief. Lowering the rate will be possible for two reasons.
First, the bill's low marginal rate and neutral treatment of saving will spur
economic growth and thus expand revenue to the Treasury. Second, the bill's
spending reforms, detailed in Title 2 below, will reduce expenditures. In short,
higher revenue coupled with lower spending will reduce future deficits, free up
resources to be returned to the American people, and thus permit a freedom
dividend to the American taxpayer in the form of a lower tax rate.
Guards against higher taxes
To help prevent a future Congress from raising taxes, rewarding a special
interest, or complicating the tax code, the bill contains a provision which requires
a 60 percent supermajority of the House and Senate to 1) raise the tax rate, 2)
create multiple tax rates, 3) lower the family allowance, or 4) add a loophole.
TITLE 2 -- REAL SPENDING RESTRAINT
Sunsets most federal programs
All discretionary and unearned entitlement programs are sunset, i.e., set to
expire automatically, within two years of enactment of the bill, and again
following each decennial census thereafter. The following earned entitlements
are not sunsetted: Social Security, Medicare, veterans' benefits, federal
retirement. Across-the-board sunsetting will force Congress to reexamine every
program individually and decide which ones deserve to be continued rather than
which ones should be cut -- the true way to reinvent government.
Caps entitlement spending
The bill provides that the total level of entitlement spending, excluding Social
Security, may not exceed the increase in inflation as measured by the consumer
price index, plus the growth in eligible population. If the increase in these
programs exceeds this level, an automatic entitlement sequester to eliminate the
excess spending will fall on all entitlements except Social Security.
Entitlement spending now accounts for more than half of all federal spending
and is the fastest growing portion of the budget. The entitlement sequester will
place strong pressure on Congress to make genuine reforms when reauthorizing
sunsetted programs.
Caps total federal spending
The bill sets caps on overall federal spending, bringing the federal budget to
balance by the year 2002. If spending exceeded the maximum spending amount
established in law, an across-the-board sequester would cut 80 percent from
domestic discretionary spending and 20 percent from defense spending.
The bill also contains a "look-back sequester." On July 1 of each fiscal year, the
President's Office of Management and Budget is required to determine the
extent to which the spending cap may be exceeded. If OMB finds the limit will
be exceeded, a look-back sequester will eliminate the excess spending under
the same 80-20 formula.
Brings the President back into the budget process
The bill restores the President to full participation in the annual budget process
by requiring that Congress pass a joint resolution, which requires his signature,
rather than a concurrent resolution, which does not require his signature, at the
beginning of the process each year. Requiring a joint resolution not only
restores some of the President's lost influence over spending, but it prevents the
House and Senate from disregarding the budget resolution, because a joint
resolution, unlike a concurrent one, has the force of law.
