If ever there was a reason to turn away from an income based tax system, it is the report from the IRS saying that the 'tax gap', what is being collected versus what should be collected, has grown to $345,000,000,000. That's BILLION.
As long as we are being taxed on our income, there are going to be those who find ways around the government taking what we earn. That means that those of us who pay our taxes will be picking up the slack.
Switching to a consumption based tax system, like the Fair Tax, will eliminate not only the lost revenue due to loopholes, but also eliminate the costs of prosecuting those who cheat. (the end of the IRS!)Of course, that would mean that Congress, elected by us, would have to voluntarily give up one of their few Constitutionally granted powers.
Check it out- www.fairtax.org
Monday, March 10, 2008
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14 comments:
Alex,
Your $345 billion in income tax evasion is certainly a problem. But surely you can't believe that there will be no evasion under the Fairtax? And a potentially larger issue with the Fairtax is legal tax avoidance. How many citizens will simply buy used goods in order to proudly proclaim that they didn't pay any federal tax? Might be quite a few.
There are 600 billion reasons not to implement the Fairtax. It's called the prebate, which is a monstrous cash grant entitlement which the country just can't afford. Entitlements are rapidly squeezing out discretionary spending in the federal budget, including Defense discretionary. There is a budget train wreck coming in the near term, and the prebate will only hasten the disaster.
A targeted prebate, much like the EITC, would have made much more sense and would have cost less than 10% of the Fairtax prebate.
Well I really see the light. Bill Gates, Warren Buffet etc will buy used goods because of the Fairtax. Walmart and Target will become indoor Flea Markets because of the FairTax. Also the Prebate is something the country can't afford. Come get real and educated.
Dutch,
It's not my $345 Billion, it's ours (because law abiding Americans pick up the tab). Of course there will always be those who try to cheat whatever system is in place. LEGAL TAX AVOIDANCE huh....I don't know what you'd be avoiding if it's not illegal???? And I hardly believe that people will largely switch to buying used goods when the price of NEW goods and services will rise only a percent or two. (embedded taxes....)
The Fair Tax prebate guarantees that noone will pay tax on those items necessary to sustain life. Nothing more. The EITC you mention is just another welfare program that redistributes income to those who have children.
The Fair Tax is fair for everyone, with no 'targets'.
Alex,
Legal tax avoidance simply means that people choose to buy used goods rather than new in order to avoid the sales tax. Evasion is illegal and can be compared to "our" $345 billion in uncollected income taxes today.
You are sadly mistaken if you believe that prices will remain about the same under the Fairtax. The famous 22% embedded costs of the income tax sustem was developed back in 1997 by Dr.Dale Jorgenson at Harvard. Two thirds of his embedded costs were employee payroll and income tax withholding. Only one third, or just over 7% are business costs which might be eliminated and the savings used to reduce prices. Jorgenson did not include compliance costs in his study, so, adding a generous average compliance cost percentage of 2.5% to all other business costs, the best you can hope for is a 10% reduction in business costs and a 17% increase in retail prices. (1.00 x .9 x 1.30 = 1.17).
The only way for prices to be reduced any further is if you and all workers and pensioners would be willing to give up your withheld amounts in the hopes that businesses would use your money for price reductions. And that isn't going to happen for contractual and fairness reasons.
I might add that as long as you keep your whole paycheck (gross), and throw in the prebate as additional income, the price increases should be essentially a wash. Your standard of living won't decline. But don't expect to save any more money than you currently do. Won't happen unless you choose change your lifestyle and buy your underwear at Goodwill.
One thing at a time.....your saying that under the Fair Tax, you think that buying used goods should be considered 'tax evasion' and we should therefore consider it illegal to buy anything used?
To be sure, some business owners will decide to try to retain the withheld amounts to pad their bottom lines...and some will keep the 22% embedded taxes in the price of their goods....and some will even try both!!
But the great thing about removing the government from the business of taking earned income away from businesses and individuals, is that it will allow the free market economy to decide who is really succesfull.
Because of competition in the marketplace, businesses will give up the withheld income, because so many others are doing it, the ones who do not will not remain competitive.
ps- I don't know how you think folks won't save more money when their investments are not being taxed. Individual tax comliance costs are also history.
Alex,
You completely failed reading comprehension. What I wrote was that buying used goods is legal tax avoidance. Illegal tax evasion is what most folks think about when they discuss potential lost revenue under tha Fairtax, but I think that tax avoidance is just as important an issue. Of course, there won't be any more money saved by buying used when compared to the typical markdown experienced today. I mention that because some folks seem to believe that by buying used, you will save the usual depreciation amount plus the sales tax amount. That won't happen. It's called the embedded cost of the Fairtax!
As for savings, you need to reread HR25, section 801-806. Investment and debt instruments will both have an implicit tax applied, a tax which could reach significant amounts depending on the going Treasury rate at the time.
Half of our citizens pay no income tax, and those that do have to file can do so at very minimum cost. Are you aware that your local AARP chapter may have a free tax preparation service? And even if you have to do your own taxes, it takes less than an hour for filers that can use the standard deduction.
I suppose some folks might consider it a minimum cost to file....others might say that it's just more money, not to mention time, out of my paycheck to ensure I'm paying the correct amount according to a tax code that's been amended over 10,000 times since the 1986 adjustments.
The Fair Tax does not apply to used goods, so if you elect to buy used there would be no "embedded cost of the Fair Tax".
As far as the avoidance/evasion issue, I suppose you could push for litigation to end 'legal tax avoidance'....but then we're getting away from the Fair Tax. You might call it a Fair Tax legal loophole I guess. But I sincerely doubt that the amount of "avoidance" (which can happen today through off-shore tax shelters) would be more than recouped in the ocean of revenue generated by a vastly larger tax base.
Alex,
The embedded cost of the Fairtax is just as real as the embedded costs of the income tax. Just takes a different form. Let me use an example to help you understand what I mean.
Lets say you go down to a new car dealer, and you buy a new car that the dealer cost plus profit is $20,000. He then tacks on the 30% sales tax and sells you the car for $26,000. Two years later, you try to sell your used car. The question is, assuming a depreciated cost of 30% for a two year old car, are you going to sell it for $14,000 (70% of $20,000) or are would you try to sell it for $18,200 (70% of $26,000)? Big difference.
I maintain that only a fool would forget about the 30% sales tax when it's time to resell. The 30% sales tax is basically embedded in the price of the car, and subsequent buyers, although not paying any sales tax directly to the feds, will be helping offset the original sales tax cost. I call that the embedded cost of the Fairtax.
I would agree that in todays market, none of us really expect to recoup any of the state sales tax, which is 6% in Florida. However, with a 30% national retail sales tax, we may see some changes in our business practices.
By the way, I certainly wouldn't want to make tax avoidance illegal. The point I was making is simply that almost all Fairtax discussions focus on the impact of illegal tax evasion through the use of shell businesses, fake SSN's, etc. Americans hate paying taxes, so it's possible that in order to avoid sending any tax money off to Wasington, people may choose to buy used, or buy new less frequently. For instance, I roll over my car every two years, but under the Fairtax, I might wait five to ten years for a new car? No one can say with any certainty just how Americans might react, but tax avoidance is certainly an issue.
Let's say the dealer sells cars today for $20,000. That price already inlcudes all of the costs associated with the construction of that car, and gets passed along to point of sale. The dealer certainly isn't going to take required payroll taxes out of his bank acocunt, he includes it in the $20,000.
Now flash forawrd to January 1st, and the Fair Tax has been enacted. The dealer gets to subtract the cost of payroll taxes (because there aren't any anymore), ect as does every business involved in making that one car. Roughly 22% of the original $20,000 was embedded taxes. That drops the price of the new car to $15,600. This price ($15,600) still keeps the car dealer at the same profit margin as $20,000 did under the old tax system. Now he has to add in the Fair Tax of 23% (of $15,600) which bring the prices up to $19,188.
Like you said before, some dealers will try to add the Fair Tax to the old sticker price and sell the car for $24,600. But another dealer won't. Where would you go to buy a car every two years?
Alex,
You're not paying attention. I didn't say that the dealer would tack on 30% to the old sticker price. That would be business suicide. What I said is that the dealer has to add a 30% sales tax to his cost plus profit. And yes, his costs under the Fairtax will be reduced by the elimination of his share of FICA, his income tax amount, and his federal tax compliance costs. All of these add up to around 10%, not 22% as you seem to believe. Take 10% out of business costs and add back profit and the 30% sales tax and you will see that retail prices must rise by 17%. Simple math.
I also read into your comments that you mistakenly believe that cost savings accumulate or cascade up through the various levels of the production of goods. That is just not true. It doesn't matter if there is one or ten levels of production, the percentage cost savings remains the same. That may not be intuitively obvious to many, but it's a fact!
Dutchman3,
Your a jackass. Whenever you get your facts straight you can come back. You must be a Democrat........
Anon,
Typical response from a Fairtax supporter when faced with the facts, chooses to vilify the messenger. But, that's O.K., I've been shot at and missed in two wars defending your right to say or write any fool thing you want to. Just don't call me a "D", I'm a lifelong "R".
More importantly, I've spent the last four years deeply involved in the Fairtax, and I suspect I've forgotten more than you will ever learn about the subject.
Tell you what. Reread my responses to Alex and point out any factual errors. I'd be happy to correct them if appropriate.
I can point out one factual error...one commonly made by Fair Tax opponents, even the Ludwig Von Mises Institute.
The 30% rate you keep quoting is inaccurate. It would be accurate if the Fair Tax was an exclusive tax, much like a state sales tax, that is ADDED to the price you see on the shelf when you get to the register.
The Fair Tax is an inclusive tax, like the income/payroll tax system it will replace. An example.....
You spend $100 for a DVD player. When you pay for it, $23 will be listed by the line item 'Fair Tax' on the receipt, and sent to the General Fund. 23% of the $100 price is $23. -inclusive
Alot of Fair Tax opponents will say "wait, the cost of the DVD player is really $77 then, and you added $23 to that to equal $100!"
That gives you an actual tax rate of 30%. -exclusive
It's only honest to quote the Fair Tax rate in the same manner that the tax system it is replacing...as an inclusive tax.
Like you, I've been through one war a few other engagments and have always been a R also, although they're testing me lately..lol
Alex,
I certainly share your concern about the "Hobsons Choice" we face in the coming presidential election. I don't know whether to sit it out, move to Australia, or throw a dart at a list of the choices and vote for whomever I hit?
As for the Fairtax rate, in the context I used it, 30% is the correct rate. That is, in order to come up with the retail price, a business must add 30% to their cost plus profit. Don't believe me? Reread the AFFT FAQ which used to be #47, but is now around the 6th from the bottom of their list.
As for the rationale in support of an inclusive rate, it falls apart when you try to compare the income tax tax rate to the Fairtax rate. Just what income tax rate would you propose to compare the 23% Fairtax rate to? Can't be done. Perhaps the Fairtaxers figured that people would do what my son did when I explained the Fairtax to him. His exact response was, "Gee, 23% sounds good to me because I'm in the 28% income tax bracket". Why fathers get grey. You can't compare the 23% rate to a marginal income tax bracket. Only when you calculate your effective tax rate under both systems can you see which is better economically. Frankly, HR25 is a sales tax piece of legislation, and it's not the place to make income tax comparisons. I would be willing to wager that the first thing the House W&M Revenue sub-committee staff will do is get rid of the inclusive language. Stay tuned!
Hope this helps.
Hank
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