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Dianetics, The Tax Plan

The basic theological tenets of the Church of Scientology are well known: a fanatical hatred for psychiatry coupled with a creation myth that involves an evil alien ruler named Xenu and his sundry galactic allies. The basic tenets of its tax policy are somewhat less familiar. But Scientologists promulgated and, at one point, heavily promoted a proposal that would replace all federal income taxes with a national retail sales tax (NRST). And the theology and tax policy aren’t entirely unrelated: Xenu used phony tax inspections as a guise for destroying his enemies.

In a strange confluence, the Scientologist proposal happens to be nearly identical to one of the trendiest conservative tax proposals of the year, the so-called FairTax, which has been endorsed by John McCain and Fred Thompson, as well as second-tier presidential candidates Mike Huckabee, Tom Tancredo, Duncan Hunter, and Democrat Mike Gravel. Georgians John Lindner and Saxby Chambliss have introduced FairTax legislation in the House and Senate that would establish a 23 percent national sales tax.

But, when you mention any hint of the nexus between Scientology and the NRST--as I did briefly in a recent Wall Street Journal op-ed--you’ll be denounced by FairTax supporters as a smear artist. This retort, however, is simply evidence that these FairTax supporters don’t know the history of their own proposal. That’s too bad. Perhaps if they understood its origins in Scientology, they might have a greater appreciation for its inherent flaws.

The story of the FairTax’s provenance is one that I can tell with some firsthand knowledge. In 1993, fresh from a stint at the Treasury Department, I spent a few months at the Cato Institute. I was filling in for Steve Moore--now an editorial writer at The Wall Street Journal--who took a brief leave from his job as director of the think tank’s fiscal studies program to advise former Texas Representative Dick Armey. It was there that I was visited by a man named Steven L. Hayes, the founder of group called Citizens for an Alternative Tax System (CATS) that promoted the nrst, and who was, as Moore pointed out to me, a prominent Scientologist.

It wasn’t hard to figure out the Scientologists’ motives for hawking the nrst. The IRS had refused to recognize Scientology as a legitimate church--a fact that seemed to enshrine their popular reputation as a “cult.” To remedy this situation, Scientologists waged war against the IRS. At various points, the Church attempted to infiltrate the tax authority and even hired private investigators to examine the private lives of IRS officials. And the same impulse behind these measures lead them to devise the nrst. One church spokesman told National Journal’s Paul Starobin, “We thought, ‘If this [discrimination] is happening to us, there must be a lot of people to whom this is happening.’ ... How could some positive changes be made?” Since nearly every state has a sales tax, it would be a simple matter to get them to collect a federal NRST, rendering the IRS instantly superfluous, a ripe target for abolition.

As Starobin told the story, cats wooed the Texas political elite, including Robert A. Mosbacher Jr., the son of George H.W. Bush’s secretary of Commerce. Mosbacher urged Hayes to reach out to Jack T. Trotter, an attorney close to Texas Representative Bill Archer, the ranking Republican on the tax-writing House Ways and Means Committee. Although Trotter and Hayes held several meetings, nothing came of it. According to Starobin, Trotter feared that the Scientology connection would turn off too many potential supporters. (Hayes, for his part, has always denied that the church played any role in his group after helping found it.) But Trotter was hooked by the sales tax idea and wanted it expanded to include the payroll tax as well. He formed Americans for Fair Taxation (AFT) in 1995 to promote the cats proposal, but without the taint of Scientologist involvement. AFT promoted the FairTax for a decade, elevating the plan to its current popularity.

By the time that Trotter had shunted the Scientologists aside, the church was losing interest in tax reform. In 1993, the IRS finally recognized Scientology as a legitimate religion, ending the rationale for a vendetta against the tax collectors. Cats basically withered. Its last tax return, filed in 2005, showed contributions totaling $1,725. A year later, the group appeared to be completely defunct. (Interestingly, in 2003, the group’s tax returns listed my old colleague Steve Moore as a director.)

A brief digression: A few years after I encountered Hayes, he gained notoriety by suing an anti-Scientologist organization called the Cult Awareness Network (CAN). When CAN declared bankruptcy in the wake of this suit, Hayes purchased the organization’s assets and name at auction. Overnight, CAN ceased to be a thorn in Scientology’s side.

The reason I brought up the Scientology connection in the first place was not to create guilt by association. Rather, it was to explain that CATS had one very specific goal: the abolition of the Internal Revenue Service. Anything else that the NRST might accomplish was entirely secondary. And, in the rush to rid the world of the IRS, the plan’s authors neglected some important details, not to mention some key facts.

For starters, the FairTax is deceptively calculated. When you think of a 23 percent sales tax, you think of paying an extra 23 cents on the dollar. That’s how every sales tax in the world works. The FairTax, on the other hand, doesn’t represent 23 percent of the pre-tax value of the item you bought, but the post-tax value of the item. So, under FairTax, you wouldn’t pay $1.23 for a $1 widget--but $1.30, since the 30-cent tax is 23 percent of $1.30. How straightforward!

The legerdemain doesn’t end there. Unlike every other sales tax in the world, the FairTax actually applies to everything--every pencil, every tank--the government buys. Unfortunately, the FairTax proposal doesn’t take into account this increase in government spending. Thus, it will either provoke a massive cut in federal spending or a massive increase in taxes.

And what about the poor who bare the brunt of this highly regressive tax? The FairTax would track every household’s monthly income and then cut checks to minimize the pain, a logistical challenge that will ultimately resemble some welfare state nightmare. What’s more, this would cost gobs of money, forcing further cuts in spending.

For these and other reasons, every reputable tax expert who has ever looked at the FairTax has concluded that the true tax rate would have to be much, much higher than 23 percent (or even 30 percent) to work--and, even at that unrealistically low rate, the plan would inspire massive tax evasion. In short, the FairTax is a crackpot scheme from beginning to end. That would be true even if the Scientologists hadn’t authored it.

Bruce Bartlett was the deputy assistant secretary for economic policy at the Treasury Department from 1988 until 1993.

By Bruce Bartlett