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Fair Tax Supporters: Whistling Past the Graveyard
Posted by: Dale Franks on Thursday, August 25, 2005

Brad Warbiany responds to my concerns about the Fair Tax's evasion potential, by telling me that they've already got that sewed up. Evasion won't be a big problem at all.
Allow me to act like Boortz for a moment. Boortz has the annoying habit, anytime someone brings up some false statement about the plan, wildly exclaiming “Sir, you don’t understand the plan.” I hate it, because it sounds so much like what a snake oil salesman would say. But I’ve got to do it:

Dale, you don’t understand the plan.

First, let me explain the two main evasion methods that I can see. The first is sellers of goods and services just simply not reporting their sales, and thus not paying their taxes. The second is buyers who have “business exemptions” going into a store, flashing their “exemption certificate”, and thus not being charged the tax.

What makes either of these possible is the idea that the taxes are tracked only at the final retail level of sale. I.e. that business-to-business (B2B) transactions are never even reported to the tax agency. Thus, there is no way to detect at the final point whether this has been paid.

And that is where it is false.

First, the possibility of just flashing your exemption card and not paying tax. In the FairTax bill (sec 509), for a business to sell goods without collecting the tax, they must have the companies exemption certificate on file, and must keep complete records of all transactions for a period of 6 years. Purchasers must keep a record of all taxable goods bought for a period of 7 years. Thus, for a business to sell you goods without charging you tax, they need to have complete information on your business on file, and they need to report (sec 501.a.2) every month on those sales. This will limit most companies willing to sell you anything without charging you the tax mainly to B2B transactions.

Under the FairTax, any seller of taxable goods and services is required to report all sales at every step to the tax administration agency. This means that if I am a primarily B2B seller, I need to report the sale and that the tax was not charged to my customer.
Brad, you don't understand the criticism.

I mean, all these stringent reporting requirements sound impressive. The trouble is that that's the way sales taxes work now. This isn't some unusually stringent scheme for sales tax reporting that is new and different. It's more or less the way the states currently require sales tax reporting. I don't care what the reporting requirements are, the problem with final sales taxes is that, at the end of the day, they rely on both the buyer and the seller—both of whom have incentives to evade paying the tax—to report the tax payments properly.

I live in California, and the State Board of Equalization has quite an impressive set of rules that mandate how intermediate, B2B, and final retail sales are supposed to be reported. The California State Board of Equalization's web site has a whole page of links that explain how the state sales tax works, and it's pretty much indistinguishable from the rules surrounding the Fair Tax's reporting requirements—except that California only requires you to maintain those records for four years, instead of seven. Every state has such rules. They always have. The fact that the Fair Tax also has such rules isn't particularly impressive. Let's not pretend the Fair Tax's reporting requirements are some novel breakthrough in sales tax reporting.

The evidence is clear: 1) States already have reporting rules that are essentially indistinguishable from the Fir Tax, and 2) the experience in the states is that at rates over 12%, sales taxes are childishly easy to evade. A 23% tax rate for a sales tax is pretty much uncollectible and unenforceable. What revenues you get, you'll get through voluntary coopoeration.

Mr. Warbiany waxes eloquent about how that all the B2B purchasers send in their reports on non-taxable transactions, and how they send in their refund requests in case they do get charged the sales tax. And that's different than what states do, how?

So the rule is that the business must record and report on their taxable and non-taxable transactions. Ok, so now I've decided not to keep those records for some favored clients. Prove I made the sales. Prove it wasn't loss through pilferage at the warehouse. If I'm gonna evade the tax, I probably won't record the sales at all. Good luck finding the evidence of that in my paperwork, since there isn't any.
As we have already seen, the FairTax has reporting requirements much like that of a VAT. This will be one major difference with in the experience of history.
Uh, well, no we haven't seen that at all. What we've seen is that the Fair Tax has reporting requiremernts that indistinguishable from the reporting requirements states have already had for decades.

The thing that makes the VAT so transparent isn't the paperwork requirements. It’s the fact that the tax is levied at every stage of production from raw goods to final sale. You can't evade it with simple collusion between the purchaser and final seller. You can only evade it if you can conspire with your complete supply chain. Moreover, you don't just keep paperwork. You actually make payments and request refunds at every step of production. Money is changing hands that has to be tracked through internal corporate accounting procedures, as well as by the tax authorities, from who you submit your refund requests, again, at every stage of production.

Sales taxes are levied only at the final sale, which, of course, is the other problem: What is a final sale? Even states, with decades of experience don't find that an easy determination to make.

The problem is not reporting requirements. The problem is the enforcement of those reporting requirements. And what's Mr. Warbiany's answer to that?
Even bigger, however, is a matter of computing power. He notes that these countries had all ended their experiments with a national sales tax by 1995. That date is significant. We have much more powerful computers for tracking and looking for patterns than we had at that time. I make the analogy to online poker. In online poker, the biggest threat is collusion: two or more players at the same table working together to cheat. All the online poker houses have to do to solve the problem is to study the behaviors normally associated with collusion, and set up software routines to look for those behaviors. When one is spotted, they investigate, and correct if necessary. Any tax enforcement agency can do the exact same thing. Keep an enormous bank of servers looking for reporting patterns consistent with tax evasion. When one is found, investigate. Maybe a company bought a lot of products tax-free, but had a bad sales month and didn’t claim many sales. They’re not committing fraud. Another company, however may have bought a lot of products tax-free, and is using them for consumption rather than a true B2B purpose, and they’re going to get nailed. The enforcement options go hand-in-hand with the reporting requirements, and as computing power increases, it will be more and more capable of solving these problems.
So, the argument, apparently, is that the IRS, a government agency that can't even find out how 1/4 of it's own budget is being spent, despite using sophisticated computer accounting systems, will magically be able to have private-sector efficiency with a computer tracking system for the entire country's sales tax revenues.

Yeah. Pull the other one.
In conclusion, from reading Dale’s article, I agree completely with him that a national retail sales tax, as he envisions it to exist, would be an enforcement nightmare. But most of the criticisms he has raised are covered in the legislation.
No. They aren't. Sorry, but the Fair tax doesn't have significantly different reporting requirements than state sales taxes have. And, in both cases, simple collusion between a single buyer and seller makes the paperwork requirements irrelevant. They just won't keep any paperwork.

The problem is, and always has been enforcement. The VAT is far simpler to enforce, if for no other reason than large-scale collusion over the entire cycle of production and sale is practically impossible. So, I don't find Mr. Warbiany's points about Fair Tax evasion compelling at all. It strikes me a blithe dismissal of the contradictory historical experience.

Divider

What is the tax rate for the Fair Tax, by the way? That's always an interesting question about consumption taxes, because, on of the philosophical criticisms about both the NST and the VAT is that the rate is at least partially hidden from the taxpayer. So what is the tax rate for the Fair Tax, as described by the legislation?
(1) FOR 2005- In the calendar year 2005, the rate of tax is 23 percent of the gross payments for the taxable property or service.

(2) FOR YEARS AFTER 2005- For years after the calendar year 2005, the rate of tax is the combined Federal tax rate percentage (as defined in paragraph (3) of the gross payments for the taxable property or service.

(3) COMBINED FEDERAL TAX RATE PERCENTAGE- The combined Federal tax rate percentage is the sum of—

(A) the general revenue rate (as defined in paragraph (4), and

(B) the old-age, survivors and disability insurance rate, and


(C) the hospital insurance rate.

(4) GENERAL REVENUE RATE- The general revenue rate shall be 14.91 percent.
Hmmmm. So the general revenue rate is set by law at 14.91% That would have to be changed by congress. Unfortunately, the rate also includes the Social Security and Medicare insurance rates as well.

So, what happens if the president, say, signs into law an expensive new prescription drug benefit for medicare? The sales tax will rise as the insurance rate rises. The same thing goes for social security, too.

So, if I'm reading this right, rather than looking at revenues and determining how much money to spend, the Fair Tax looks at how much money is being spent, and adjusts revenues accordingly, by raising taxes as necessary.

How...convenient for the government. As the Mises Institue's Lawrence Vance puts it:
The FairTax will make it easier for Congress to raise taxes. The initial rate of 23 percent is supposed to begin in 2007. For years after 2007, "the rate of tax is the combined Federal tax rate percentage." This combined percentage is the total of three things: the general revenue rate (stated to be 14.91 percent); the old-age, survivors and disability insurance rate; and the hospital insurance rate. This is all but saying that the rate will be adjusted every year. And it will be very easy for Congress to do so. To raise several billion dollars of additional revenue, all that will be necessary is for Congress to raise the tax rate by one percentage point by small adjustments in one or more of the three items that make up the combined percentage rate. It will be sold to the American people as "a penny for progress," or some other deceitful scheme.

Under the FairTax system, there are no longer any Social Security and Medicare taxes. However, this does not mean that Social Security and Medicare will be eliminated. The inclusion in the combined percentage of the old-age, survivors and disability insurance and the hospital insurance rates means that the Ponzi scheme known as Social Security will continue as is—only the way it is funded will change.
And the increases in the rate will be so tempting to make won't they, because the sales tax cost is at least partially hidden from the consumer?

Divider

But, getting back to Mr. Warbiany's confident assertion that we can find out who the sales tax evaders are becuase of their paperwork requirements, another thought occurs to me.

The argument about the paperwork requirements stamping out tax evasion are fallacious for another reason in addition to those mentioned above. Implicit in Mr. Warbiany's defense is that the things I buy as a businessman are related to the things I sell. I buy widget pieces, and assemble them into widgets, and we can track the widget pieces and widgets to be sure I'm not doing anything naughty.

Well, OK, maybe, if we assume that everybody will honestly record their paperwork—which, manifestly, they do not historically do, but let's overlook that. Even assuming arguendo, that the paperwork requirements will help stop direct evasion as far as the production cycle goes, the simple fact is that businesses buy a lot of things that aren't part of the products they sell.

Office supplies, computers, video equipment...there's all sorts of stuff that you can't track because businesses don't use them directly in the production process. So, what do you do with an enterprising businessman who uses his tax exemption to buy a few extra computers, or office supplies, then sells them at a 10% markup to his buddies. He makes an extra 10%, and his buddies het a 15% reduction from the retail price. A little cash changes hands, and no records—of course—are ever kept.

How will you discover that little wrinkle?

Q: Hey, you're supposed to have 10 extra computers here! Where are they?
A: Oh. They broke. We had to scrap them. Prove otherwise, tax-boy.

Q: It appears you purchased a lot of food supplies. Where'd they all go?
A: Employee snack bar. We got hungry.

Of course, those questions will never be asked, because there's no way to track the disposition of consumable or capital items through the Fair Tax's reporting requirements.

Divider

So, with all due respect to Messrs. Boortz and Warbiany, the problem is not that I don't understand the plan. In point of fact, I understand the plan quite well, which is precisely why I think it's a pipe dream.
 
UPDATE: [Jon Henke]

I think a lot of people don't understand the very real, very massive psychological barrier that a 23% sales tax rate (30%+ with state/local taxes) would be. Right now, you can't really avoid it. You want to buy a TV, you're going to pay about the same thing no matter where you get it. The tax costs are built into the price, and there's very few substitution options. You can't even save money by buying used or making one from component parts, since they incorporate the already-imposed taxes. You'll either pay the costs, or you'll go without.

But if all of that tax is built into an retailer-imposed, final-product sales tax, and not on the production process, there's suddenly a raft of new options.

For one thing, black markets and bartering are going to become very popular. With only State and local sales taxes, there's not a lot of incentive to takes sales to the black market. What're you going to save, 5%? Why bother? But when that savings becomes 20-30%, suddenly, black markets and barter become much more attractive.

For another thing, how do you prevent people from exempting purchases from sales tax by buying items for "business use"? That already goes on now (especially at places like Sam's Club, Costco, etc). When the incentive to do that increases from 5% to 28%, the evasion activity will increase as well.

And then there's the fact that quite a lot of our consumer products—the TVs mentioned previously, for example—are made outside of this country. A reduction in payroll taxes on US companies isn't going to do much to bring down the price of a Japanese-made TV. But the price of that TV will still go up by 23%.

Even if widespread prices do go down—and as sticky as wages are downward, that's questionable over the short/medium term—the fact that the tax burden has been converted into a one-time hurdle rather than a slow ramp makes it much more obvious to the consumer...and much more avoidable, as well.
 
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Comments
The arguement against the sales tax is correct. The better idea is to finish the task of converting the [form 1040 and 1120] income tax into a consumption tax. We’re not too far off right now. By allowing personal deductions for living costs, interest, etc and for those engaged in business activity, expenses; income taxes now are actually deducting costs that allow them to be closer to a consumption tax. In order to make the income tax a consumption tax, the remaining deductions need to be tacked on, such as savings income deduction and the elimination of the captial gains tax. Elimination of dividend taxation, depreciation and capital losses should also be persued [since, in the case of the latter two, capital gains is no loner taxed].
 
Written By: Orlando Armaswalker
URL: http://
Dale - if the VAT is simpler to enforce and better for the economy/society/government then why are we not doing it? I keep reading what you write about the Fair Tax and still haven’t clicked as to what the problem is other than it’s a ’pipe dream’.

Can you explain what happens to the IRS under a VAT system? Under the Fair Tax the IRS goes away. Do we get that benefit under a VAT? What about the hidden ’cost’ of a VAT - will the end user ever know what they ultimately paid in taxes? For all the talk about evasion, I’m curious as to your thoughts about economic growth. If the taxes that currently penalize corporations go away, would it not make sense for them to relocate here and bring all their cash with them? More cash in the economy along with more production facilities to make things that can then be sold without draconian taxation. Would that not be better than what we currently have?

I’m sorry Dale - I still see more benefit than risk when I evaluate this proposal and will continue to support it.
 
Written By: meagain
URL: http://
I keep reading what you write about the Fair Tax and still haven’t clicked as to what the problem is other than it’s a ’pipe dream’.
What part of "tax evasion is rampant at rates of over 12%" do you not understand?

What part of, "every OECD country and US state that has tried high-rate sales taxes has had to scrap them because of compliance enforcement was practically impossible," do you not get?

Sales taxes do not work at rates higher than 12%. They’ve never worked anywhere in history, anywhere they’ve been tried in the US, or in 19 other OECD nations. The reason they don’t work is because even small children who haven’t yet learned to speak find simple ways to evade paying them.

You want to support the Fair Tax as a rational way to restructure our tax system, then go ahead. You can support perpetual motion as a solution to high oil prices, too, for all the good it’ll do.
 
Written By: Dale Franks
URL: http://www.qando.net
" Prove it wasn’t loss through pilferage at the warehouse"

Particularly when high tax rates raise the incentive for REAL pilferage. That is to say even a hyper-honest businessman keeping good records is going to show increasing pilferage as the high taxes raise the potential returns for thieves and their fences. So an only-medium business decides to cut himself in for a piece of this action—how can the taxman prove it?
 
Written By: pouncer
URL: http://
" Prove it wasn’t loss through pilferage at the warehouse"

Did that business owner file a police report on the pilferage? If not, why? Do we add lying to the police to the potential charges?

In the scheme of things, most businesses decide the proceeds are not worth the risk.

Will it happen to some degree? Do we have crime in the United States? The answer is enforcement.
 
Written By: Duane Neighbors
URL: http://
And then there’s the fact that quite a lot of our consumer products—the TVs mentioned previously, for example—are made outside of this country. A reduction in payroll taxes on US companies isn’t going to do much to bring down the price of a Japanese-made TV. But the price of that TV will still go up by 23%.
And therein lies one of the great things about the FairTax. Yes that imported Japanese TV will go up by 23%, but the American made TV will be going down in price. So we suddenly start buying American produced products. We start shipping our cheaper products overseas. (No sales tax on exports) The trade deficit goes away. American corporations that are flocking to tax havens will be coming back to America and bringing jobs with them.

If something isn’t done soon there will be no businesses here to work for.

With the FairTax Illegal Aliens and Drug Dealers are paying taxes now. Suddenly working for $3.00 an hour under the table doesn’t look so good when you have to pay a 23% tax on everything to support your family. Citizens get a prebate to prevent paying taxes on necessities, but Illegal Aliens will not.

Now all this avoidance business. Yes you will have avoidance, just like you do now, but they do try to prevent it with the FairTax. While they disolve the IRS, many of those workers will go into a new department to prevent the tax evasion. These people will now be looking at businesses instead of the everyday Joe. They will be watched at a State level and a Federal Level. Just watching for tax avoidance with businesses is easier than watching every American.

Businesses get to keep a percentage of the collected sales tax for collecting and reporting it. This is an incentive. As a business I have 2 choices: Keep the sales tax I collect (or not collect it) and take a chance of going to jail and having my business shut down & owe 150% of the taxes I originally owed, or I can pay the tax I collected & make a fee for doing so. Hmmm, let’s see, that is a tough one... not!

You cheat a little on your income taxes and you pay a fortune to make it up. You get caught collecting and not reporting Sales Taxes and suddenly you can get buried & lose everything you have worked for. Unlike failure to pay income tax, with a failure to pay sales tax you get hit with 150% bill, plus interest, penalties and actual charges brought against you in the court of law. You get a few cases where businesses get buried, lose it all & their owners go to jail then I think your instances of tax avoidance will sharply decline!

I am a business and I am not willing to take that chance. My business supports me and my family. If you buy from me you will pay the tax & I will report it just like I do now.

A VAT is a very bad idea. Take the UK VAT which is set at 17.5%, it is charged at every stage of production & they still have the income tax. The UK taxes everything except exports! Start a VAT here and you get the same problem of double taxation. Politicians still able to give the pork to their buddies in the income tax code & us still not able to see or understand it, while paying a VAT on top of this. As long as there is an income tax they have the right to slip the things in that make us pay more.

The FairTax isn’t perfect... no tax system is, but it is a heck of a lot better than what we have now & a VAT scheme leaves that in place, even if it does claim a lower income tax rate... for now!
 
Written By: Mary Lee
URL: http://www.dinnerandamurder.com
Duane,

maybe enforcement would help. However, lots of enforcement doesn’t mean that on balance we will not see a large amount of black market activity and barter to get around it. For example look at cigarettes. They have long been one of the largest black market items because their taxes are so high. Once again it has been tried before and failed. No one has answered Dale’s objection. That would require showing how this time is different.

Given the VAT suffers less from these problems I am curious why not that? Same basic idea. Number one is that it is hidden. So how to fix that. I would love a VAT that wasn’t hidden. Dale?

Mary Lee doesn’t like the VAT because it leads to double taxation. So could the FairTax. Either way you would have to eliminate the income tax to avoid it. The Fair tax does, so could a VAT.
 
Written By: Lance
URL: http://
And then there’s the fact that quite a lot of our consumer products—the TVs mentioned previously, for example—are made outside of this country. A reduction in payroll taxes on US companies isn’t going to do much to bring down the price of a Japanese-made TV. But the price of that TV will still go up by 23%.
And therein lies one of the great things about the FairTax. Yes that imported Japanese TV will go up by 23%, but the American made TV will be going down in price. So we suddenly start buying American produced products. We start shipping our cheaper products overseas. (No sales tax on exports) The trade deficit goes away. American corporations that are flocking to tax havens will be coming back to America and bringing jobs with them.

If something isn’t done soon there will be no businesses here to work for.

With the FairTax Illegal Aliens and Drug Dealers are paying taxes now. Suddenly working for $3.00 an hour under the table doesn’t look so good when you have to pay a 23% tax on everything to support your family. Citizens get a prebate to prevent paying taxes on necessities, but Illegal Aliens will not.

Now all this avoidance business. Yes you will have avoidance, just like you do now, but they do try to prevent it with the FairTax. While they disolve the IRS, many of those workers will go into a new department to prevent the tax evasion. These people will now be looking at businesses instead of the everyday Joe. They will be watched at a State level and a Federal Level. Just watching for tax avoidance with businesses is easier than watching every American.

Businesses get to keep a percentage of the collected sales tax for collecting and reporting it. This is an incentive. As a business I have 2 choices: Keep the sales tax I collect (or not collect it) and take a chance of going to jail and having my business shut down & owe 150% of the taxes I originally owed, or I can pay the tax I collected & make a fee for doing so. Hmmm, let’s see, that is a tough one... not!

You cheat a little on your income taxes and you pay a fortune to make it up. You get caught collecting and not reporting Sales Taxes and suddenly you can get buried & lose everything you have worked for. Unlike failure to pay income tax, with a failure to pay sales tax you get hit with 150% bill, plus interest, penalties and actual charges brought against you in the court of law. You get a few cases where businesses get buried, lose it all & their owners go to jail then I think your instances of tax avoidance will sharply decline!

I am a business and I am not willing to take that chance. My business supports me and my family. If you buy from me you will pay the tax & I will report it just like I do now.

A VAT is a very bad idea. Take the UK VAT which is set at 17.5%, it is charged at every stage of production & they still have the income tax. The UK taxes everything except exports! Start a VAT here and you get the same problem of double taxation. Politicians still able to give the pork to their buddies in the income tax code & us still not able to see or understand it, while paying a VAT on top of this. As long as there is an income tax they have the right to slip the things in that make us pay more.

The FairTax isn’t perfect... no tax system is, but it is a heck of a lot better than what we have now & a VAT scheme leaves that in place, even if it does claim a lower income tax rate... for now!
 
Written By: Mary Lee
URL: http://www.dinnerandamurder.com
Yes that imported Japanese TV will go up by 23%, but the American made TV will be going down in price.
Yeah. Your right.

Except that not a single television set has been made in the United States in about a decade.
Businesses get to keep a percentage of the collected sales tax for collecting and reporting it. This is an incentive. As a business I have 2 choices: Keep the sales tax I collect (or not collect it) and take a chance of going to jail and having my business shut down & owe 150% of the taxes I originally owed, or I can pay the tax I collected & make a fee for doing so. Hmmm, let’s see, that is a tough one... not!
You know what? That is an extraordinarily stupid counter-argument. Because at high sales tax rates, evasion of the sales tax is endemic. That has been a universal characteristic of high-rate sales taxes everywhere, including the US, where they have been tried.

So, apparently, the easy choice is to evade the sales tax and keep the money for yourself. Arguing that people would never evade paying the sales tax, when more than half a century of experience makes it quite clear that people do precisely that inclines me to beleive that your interest in the Fair Tax is a religious one, not a rational one.

You don’t care about the facts, your mind is made up. And if the real world contradicts your optimistic assumptions, then it’s the real world that’s got it wrong.
 
Written By: Dale Franks
URL: http://www.qando.net
For DALE: I did not say that people would not avoid paying the tax as you said I did. In fact I said that you would have avoidance, I just said that it could be reduced.

"It sounds like your mind is made up" & unlike you I am trying to use logic and I am not callling you stupid and other derogatory terms which leads me to an understanding of your mind and personality or lack thereof.
 
Written By: Mary Lee
URL: http://www.dinnerandamurder.com
Speaking of religion, isn’t it extreme religious fantatics that thump their bibles and claim everyone else is wrong? Sounds like you, not me!
 
Written By: Mary Lee
URL: http://www.dinnerandamurder.com
A national sales tax would place the responsibility for tax collection on the retail sector, a sector of the economy in which small businesses are strongly represented. Small businesses are viewed as more likely to evade taxes since the owners, who would benefit from tax evasion, are more likely to also be responsible for keeping the books and filing the tax returns. There is, of course, some truth to this proposition. A number of factors, however, would mitigate the problem. First, those small business owners who are inclined to evade the sales taxes are probably already evading the income tax and would be inclined to do so under any tax system. Second, the economic importance of small firms in the retail sector is usually grossly overstated. According to Congress’s Joint Committee on Taxation, small firms account for only 14.9 percent of gross receipts by all retailers, wholesalers, and service providers. Sole proprietorships, perhaps the most likely to evade tax under the present system and under a sales tax, are not included in the committee’s figures.

Because the tax collection points would be concentrated at retail establishments rather than individuals or other businesses, it would be easier for revenue agents to concentrate their enforcement efforts. The collection points in an NST system would be perhaps 20 percent of those under the current income tax system or other alternative tax systems. Because the number of collection points is so much lower, if enforcement funding is held equal, then the likelihood of the tax evader’s being discovered is correspondingly higher. In other words, the risk of detection would increase and the risk-adjusted cost of evasion would increase. Increased evasion among retailers would be outweighed by a rise in business compliance resulting from greater simplicity and the perceived greater legitimacy of the tax system, reduced temptation due to lower marginal tax rates, and higher risk of detection due to a smaller collection population. Even if evasion rates were higher under a sales tax, however, they would have to be much higher to justify, even from the narrow view of government revenue, the huge compliance costs that are largely deductible as a business expense. If compliance proved to be a problem, information reporting along the lines of today’s Form 1099 could be implemented to facilitate cross-checking by government auditors. Such reporting would reflect the quantity of product sold to retailers. An auditor could then ensure that the retailer’s books either reflected the sale of those products or that the products were in inventory.

Among all tax proposals—and particularly in comparison with the current tax system—the NST would be the tax most clearly visible to the consumer. Any NST plan should require vendors to separately state and charge the tax imposed. In that way, the consumer will see the full cost of government every time taxable property or services are purchased. Under the sales tax, hidden taxes would be eliminated.
 
Written By: Mary Lee
URL: http://www.dinnerandamurder.com
The FairTax does provide for repealing the 16th amendment and all income taxes. VAT proposals I have heard of do not do this. A VAT also taxes at every stage of production which increases prices. A FairTax does not which is part of the reason taxes would go down.

You actually proved my point with your inacurate TV anology. In fact there is a television manufacturer in the United States. These jobs too are moving overseas. This is due to the low costs of imports and the high costs of U.S. manufacturing. The Fair Tax would shrink the cost of manufacturing and allow us to compete in all markets (including foreign ones!). Here is info about the one remaining manufacturing plant:

Although Five Rivers is not well known, the products it manufactures at its Greeneville, Tennessee, plant are household names. Seven hundred IUE-CWA workers turn out televisions with brand names such as Philips and Samsung at the only American-owned television factory left in the U.S. But if the predatory trade practices of China and Malaysia are allowed to continue, Five Rivers will soon be out of business too.
 
Written By: Mary Lee
URL: http://www.dinnerandamurder.com

Under the Fair Tax the IRS goes away
What is the entity then that has to enforce the rules that a retailer must follow to ensure that the business expemption rule is being followed & taxes are being collected?

It sounds to me that we’re eliminating some buracracy (my tax collectors) and creating a new one (forcing retailers to track things they need not do right now).
 
Written By: h0mi
URL: http://
Actually businesses are already tracking sales & reporting them to the state sales tax authority. This would just be another line on the same form, but the figures would have already been retrieved for state sales tax purposes so it is actually 0 extra paperwork or bookkeeping work.

There would have to be an enforcement agency for retailers, but the average person would neevr have to worry about the IRS or a like agency in their personal business or finances ever again.
 
Written By: Mary Lee
URL: http://www.dinnerandamurder.com
The FairTax does provide for repealing the 16th amendment and all income taxes.

I don’t see 39 states signing on to repealing the 16th amendment. I’ll believe it when it happens. And this only covers federal income taxes, the states would still be free to collect income tax...unless there’s another amendment to prohibit that, and there’s no way on God’s green earth that states like California and New York would ever sign on to the plan.

There would have to be an enforcement agency for retailers, but the average person would neevr have to worry about the IRS or a like agency in their personal business or finances ever again.

This would be true only in the states not collecting income tax. Most states (40 or so) collect income tax, so the people in those states would still have an IRS-like agency with the authority to look into their personal finances.

I’ll need to read the book, but I’m really curious to see how the FairTax handles Social Security. Is Social Security to remain payroll taxes? What about Medicare, and unemployment insurance? If not, since the benefits are a function of contributions, how do we deal with payments to people who’ve been contributing to Social Security for 40 years only to have the whole system change? And in the future, would everyone get the same Social Security benefit?

 
Written By: Steverino
URL: http://steverino.journalspace.com/
Mary,
The FairTax does not repeal the 16th amendment. It repeals all income taxes, but not the actual amendment. This is a point of contention for many libertarians about the FairTax, but I think combining the two would make the burden to get the FairTax passed far too high.

Not nit-picking here, but I wanted to point this out before Dale got to it.

Dale,
I will be giving a response, but it won’t be until Sunday or so (out visiting friends this weekend). I’ll track back to this post with my response.
 
Written By: Brad Warbiany
URL: http://unrepentantindividual.com
I am not callling you stupid and other derogatory terms which leads me to an understanding of your mind and personality
I didn’t call you stupid. I called the argument stupid, which is a completely different thing.
 
Written By: Dale Franks
URL: http://www.qando.net
Mary Lee,

I am not totally convinced of Dale’s critique, however you still haven’t shown why his objection is wrong. You need to find some reason things are different now as opposed to past experience.

In addition you have not said in a way I can understand why the VAT wouldn’t be preferable. You claim it doesn’t eliminate the income tax. That is not a feature of an NST either. It is part of a bill to enact an NST. Therefore you could easily propose a similar act in enacting a VAT. Your objection that the VAT is levied at every stage of production and therefore raises prices seems to misunderstand how a VAT works. Outside of the accounting it has no more effect on prices than an NST. It only changes the collection points from a final sale to each stage of the sale. The total tax should be approximately the same. Maybe I misunderstand how it works, but explain how if I do.

Dale, again I am curious if it is feasible to make the cost of the VAT transparent, which is one of my favorite features of the FairTax.
 
Written By: Lance
URL: http://
I, for one, looked to purchase my laptop online specifically to avoid paying sales tax.

If people are already highly motivated to avoid (and possibly cheat) sales tax at just 8 percent, how much more motivated will they be when the sales tax is over 20 percent?

Why even consider a national sales tax when there is such a fair, simple solution sitting under our noses? How about sticking with income taxes but only on individuals, not on businesses, and eliminating all loopholes and deductions? Think what a boost this would give to our economy! And it would be fair so most people would not have much motivation to cheat. With the boost to the economy and the reduction in cheating, I think the government would take in more money and we would all have more money left in our pockets!

Please see: Fair Simple Tax for more information.
 
Written By: David
URL: http://www.FairSimpleTax
I, for one, looked to purchase my laptop online specifically to avoid paying sales tax
Indiana "requires" taxpayers to report online purchases on the state tax form (and then taxes them). I’m not sure how they determine if you’re lying, though.
 
Written By: JWG
URL: http://
Dale made some good arguments about possible evasion, but he also made them in a vacuum.

He fails to mention that evasion of the VATs in Europe are also rampant. He fails to mention that 85% of retail sales are made from major corporations—not small businesses—and Wal-Mart and Target are NOT going to risk their business with evasion. He ignores the evasion rates under the income and payroll taxes. He pretends it only takes two people to evade the FairTax but ignores the fact that it takes only a single person to evade the Income and Payroll taxes.

You cannot evaluate a tax system in a vacuum. You can only compare it to another tax system.

So let’s suppose a very dishonest small-business community—half of all small businesses operate under the radar and don’t collect or remit the FairTax. So we lose 23% of 7.5% of all purchases. We’ve lost 1.78% of all purchases. Roughly $150 Billion. That’s horrible ! Until you notice that the IRS regularly reports $350B of taxes owed unpaid every year—not including illegal activity. Estimates of illegal activity are over $1T, meaning at least another $250B in tax revenue lost. So we are really talking about $150B lost under the FairTax vs. $600B lost under the Income and Payroll Tax system.

A VAT requires extensive paperwork and payments and credits and the economic latency that delays of those payments create. That is a drag on the efficiency of any economy. Reporting at each layer of the supply chain under the FairTax would be substantially less, but still include a minimum level of info—essentially, what you sold B2B and what the certificate# of the purchaser was. For a Retailer to collude with a Consumer and evade the tax means the supplier to the Retailer still shows a B2B sale that is not reflected the the Retailer’s sales and is not in his inventory. Software will find these suspicious Retailers quite easily and target them for sting operations where an agent tries to tempt the Retailer into giving them a tax-free deal. And remember, even if we don’t catch any of them at all, we’ve lost only 1/4 of what slips through the Income and Payroll Taxes.

Compare this evasion to the Income and Payroll taxes. How many people in a small-business does it take to evade those ? Just the owner. That’s all.

At least with the FairTax the consumer has to be in on the evasion as well. Offer a reward—say 10% of taxes and penalty for the year—for being the first person to report a suspected Retailer and Retailers won’t be willing to risk operating off the books. Remember, there is that previous layer of suppliers that probably ARE keeping records. Claiming pilferage or breakage might work, but anything significantly higher than the statistical norms for an industry are going to flag you for a painful and time-consuming audit. An audit is not always about collecting owed taxes. Sometimes it is just about nuisance-factor and discouraging certain behaviour. For a small-business owner, their own personal time is probably what generates their profit. Having an auditor suck up that time every month because your numbers are outside statistical norms is not going to be worthwhile.

Remember, the States receive 25 basis points of the revenue collected. For California, that would be almost twice what they are spending on enforcement of Sales Taxes, Tobacco Taxes, Alcohol Taxes, and Fuel Taxes—combined. With that kind of funding, I would worry more about overzealous State Auditors than evasion.

As far as buying items under a business certificate and back-dooring them to friends goes, again you will hit statistical minefields triggering audits. How many TV’s can an office with twenty workers reasonably purchase ? How many PCs ? Remember that there are now laws requiring these to be disposed of properly. You can’t say they were scrapped if you don’t show proof from the recycling center. Still this is the most likely evasion. The question is what volume could it possibly be ? And it is something that probably already is being expensed by dishonest businesses and slipping through the Income Tax. So it isn’t a net loss compared to the Income Tax.

I wouldn’t mind different classes of certificates that limited what items could be purchased tax-free. That is not spelled out in the FairTax bill, but it would depend on how the State chose to implement the FairTax. The State has a stake in the revenue, so intelligent design to reduce auditing needs would be expected.



 
Written By: Kirk
URL: http://
Looks like I got an answer to one of my questions, right from FairTax.org website:
Employers will continue to report wages for each employee, though, to the Social Security Administration for the determination of benefits
This means that there will still be an agency of the federal government that keeps track of your wages. It also means that the paperwork for employer reporting is NOT just filling out the sales report that you’d file with the state sales tax bureau.

Sorry, there are too many holes in the FairTax supporters’ stories for me to buy into this plan.
 
Written By: Steverino
URL: http://steverino.journalspace.com/
Glad you could do a little research and find the answer to your own question, Steverino !

Yes, wages will be reported to the Social Security Administration so the benefit calculations can be done.

I look forward to the amusing spectacle it will create. Currently, the amount of wages reported determines how much FICA tax is owed—so anybody who can under-report their earnings does. That includes cash tips for service people, cash side work for contractors, etc. When reporting it has no effect on the taxes owed, but does have an effect on the benefit one would receive, people might be tempted to inflate their earnings where in the past they under-reported.

Of course, that would call attention to their past behaviour, so it would be a risky move. After a few years, however, I think we’ll finally know what these scofflaws were really making all the years they cried "poor".

Before-tax income was just under $40K per capita in 2004—based on what people reported. Wanna place any bets on what the as-reported figure will be after the FairTax is in place ? $42K ? $45K ?

Seriously, I’m not very happy with how the FairTax addresses Social Security. It severs the link between earnings reported and the tax owed—and this would lead dishonest people to report more earnings to pump up their future benefits. That sounds like trouble to me.

Of course, you can’t solve all of the country’s problems with a single piece of legislation. So it is understandable that HR25 attempts to leave Social Security out of the issue as much as possible. The FairTax ensures funding for it and maintains a system to allocate benefits. But it is certainly not fraud-proof. Social Security cannot simply continue as the only remaining income tax, however, because that would 1) be seen as highly regressive, 2) not accomplish the reduction in cost structure for American production, and 3) not eliminate the IRS.

As written, the FairTax would eliminate any possibility to reform Social Security by allowing private accounts. True, in theory, the Social Security Administration could allow each person to invest an amount based on his reported earnings. In practice, there is too much disconnect between the SS portion of FairTax paid by an individual via purchases and their earnings. Many people would be spending millions while their benefit tops out based on spending $90K. Others would be spending very little while over-reporting their earnings to boost their benefit.

Of course, the SS tax vs. benefit formula is already such a bad deal for high earnings that it is hard to imagine it being worse under the FairTax. Maybe it is time to stop pretending it is a retirement plan and call it what it is—Welfare.

Bottom line: Social Security is an issue that will need to be re-addressed after FairTax implementation.

 
Written By: Kirk
URL: http://
Overheard . . .

******

Fellow Lemmings . . .

There is no avoiding the cliff, however, there are legitimate concerns to be considered. For instance, the rocks below . . . Are they sharp, or blunt? Will the presence of the river factor into our quick descent? Some have spoken to the existence of wind currents that have allowed some lemmings to land safely, a matter that must be addressed in timely fashion, since all lemmings must die their fair share.

The architect of the cliff is becoming impatient with us, and might just push us off regardless of our concerns. I say—let us march boldly off the cliff, as good lemmings ought to do!

 
Written By: jb
URL: http://
Kirk- And the administration will take credit for increasing wages.

I’d favor taxing consumption, rather than production. Perhaps a VAT. I just don’t understand the philosophical fervor for VATs or NSTs. You’re still being screwed by the government, just in a slightly more efficient and less obtrusive way. It seems like it would be more effective to push for privatisation and a decrease in the size of the public sector (the libertine end goal) rather than reshuffling the methods of taxation.

For the heck of it, I’d support the VAT. Any system will be cheated, but the incentive for cheating at the VAT is less at any given stage, while the risk is the same.
 
Written By: Effeminem
URL: http://ethermind.blogspot.com
Effeminem,

"... just in a slightly more efficient and less obtrusive way." I take it you don’t think the method of taxation matters as much as the amount of spending that demands high taxation ?

Well, I doubt you would find a Libertarian or Conservative that would disagree that spending is a huge problem. But ... the tax system itself is deeply involved in the problem. The current income tax lends itself to manipulation and class warfare that ensures ever higher taxes. A truly flat income tax without deductions or exclusions and a simplistic definition of "income" is theoretically possible. That would mean small groups of people couldn’t be targeted and be at the mercy of the tyranny of the majority. Unfortunately, we’ve tried and failed at simple income taxes multiple times over the last 100 years. It has always come down to this round-robin of victimizing one group after another, with government growing at each step. The visible, single-rate, no exclusion aspect of the FairTax is what finally prevents this singling-out and victimization we’ve seen follow every attempt to simplify an income tax.

When government growth requires higher taxes paid for by everyone rather than pitting a majority against a minority of taxpayers, government growth will be much more difficult.

There has been some talk here about the 20%-30% figure of embedded tax costs being an invalid figure. I’ve looked at that figure many times over the last five years and I have no trouble reaching 20% as an average for any industry I’ve looked at. This means that of the $9T spent by Americans in 2004, $1.8T was prices bumped due to the existing tax system. That is without even counting the taxes paid by individuals for income and payroll taxes and excise taxes. If you look at the IRS data book for 2004, however, you would find that corporate income taxes were <$200B and employer-side payroll taxes were about $350B.

If you add in non-corporate small-businesses, you reach a grand total of $800B in taxes remitted from all businesses to the Federal government. But it cost us $1.8T in higher retail prices. That is more than just a little inefficient. That is $1T worth of inefficiency. That is the same amount individuals paid in income taxes and payroll taxes. If you could gain back all of that inefficiency, there would be no need for individual income or payroll taxes.

The 23% essentially replaces the embedded tax costs in retail prices with a sales tax. It also includes some built-in welfare to mitigate "regressive" arguments. A necessary evil politically. Otherwise the rate could be 20% rather than 23%.

The relative efficiency of the FairTax vs. the existing sytem is not a minor benefit—it is what pays for the tax reduction for everybody.
 
Written By: Kirk
URL: http://
Jon,

Many of your arguments are made in a static model. It is like projections of revenue after a tax cut and assuming the same GDP. The tax cut historically increases GDP, and in now three famous examples (Kennedy, Reagan and W) increased revenue.

My point - why wouldn’t expenses savings on the IRS be used to inprove enforcement? Why wouldn’t more manufacturing move into back into the States where companies now have a competitive advantage. See Mary Lee’s points above and your pissy comments about "no one makes TV’s in America." Well, maybe not now, but why would you expect that to remain true? Toyota and Honda make cars here now, for other competetive reasons.

My support for this system was already there, but now I’m inclined to think Jon that you and Mary Lee may have touched on something else—the competitve advantage to American manufacturing.
 
Written By: KJ
URL: http://nogovernmentcheese.blogspot.com/

 
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