Posted on 04/16/2004 12:20:39 PM PDT by esarlls3
April 15, 2004, 11:09PM
By RAD SALLEE
Copyright 2004 Houston Chronicle
Now that the dreaded deadline is past and the tax forms are in the mail, consider this question: Would you rather slog through a morass of paperwork every April to send Uncle Sam a chunk of your income or have the sales clerk take 23 cents in tax out of every dollar you spend?
U.S. House Majority Leader Tom DeLay, R-Sugar Land, and Republican U.S. Reps. Kevin Brady and John Culberson chose the perfect downtown stage Thursday to promote the second choice, which they call the FairTax.
As about 100 supporters, most of them members of the group Americans for Fair Taxation, rallied outside the Main Post Office at 401 Franklin, a steady stream of cars and trucks rolled through the driveway to drop off last-day tax returns.
Also on hand was Rep. John Linder, R-Georgia, sponsor of the FairTax bill, HR25. Linder said the campaign for the proposal, technically a consumption tax on retail sales, was launched in Houston by businessmen, including Leo Linbeck and Bob McNair.
Linder said Culberson's predecessor, Bill Archer, supported the idea, which has gotten a big boost with DeLay on board.
"Now it's time for Texans to get the president behind the bill," he said.
DeLay described the Internal Revenue Code as "a 1.6-million-word, job-killing monstrosity ... written by tax lawyers to be incomprehensible."
The FairTax would not only be simpler, he said, but also would replace the personal income tax, corporate income tax, capital gains tax, inheritance and gift taxes and Social Security-Medicare taxes.
It would not replace state and local sales taxes, however.
Culberson said the FairTax would be collected like a sales tax and would not penalize taxpayers for saving and investing their money instead of spending it.
Linder said the FairTax would increase saving and investing, expand the economy and help stanch the flow of U.S. dollars and jobs overseas.
Skeptics note, however, that a rich man's purchase of a yacht and a widow's winter coat would both be taxed at the same rate -- about 23 percent at current federal revenue levels.
Food and medicine would be taxed, too. The only purchases exempted would be used goods, business expenses and the costs of education, which would be treated as an investment.
To ease the burden on the poor, each family -- rich or poor -- would get rebates equal to the federally defined poverty-level income, multiplied by the tax rate. At a rate of 23 cents per dollar, a single person living alone would receive $160 a month and a family of four with two children would get $431 a month.
Joe Barnes, a research fellow at Rice University's Baker Institute for Public Policy, said junking the income tax for a simpler alternative is a tempting idea fraught with unknown consequences.
"I'm very sympathetic to consumption-based taxation, but I have profound misgivings about its workability," Barnes said.
For one thing, he said, experience in Europe indicates that when similar taxes climb to about 20 percent, cheating becomes widespread. Because an enforcement mechanism will be needed, he said, "It will not lead to the abolition of the IRS."
"I think it would lead to gigantic off-balance-sheet transactions," Barnes said.
The tax would seldom be paid on personal services, he predicted, and there would be temptations to falsely claim purchases as business expenses.
Barnes said there also would be intense political pressure to exempt some expenses, such as medical care, food and housing, from the tax. For every exemption, he noted, the tax rate on other goods must increase to maintain the same revenue.
ON THE INTERNET FairTax proposal www.fairtax.org and www.ctj.org
Evasion will exist in any system. Reasons for evasion include marginal rates, perceived fairness, ease of understanding, and likelihood of being caught, among others.
The marginal rate seems high, but is less than we're paying now by a good margin. We pay about 25% in tax on every single retail purchase right now (although many folks don't know this) plus we pay income and payroll taxes. Also, folks will have their whole paycheck with no federal deductions to spend, ameliorating this irritation.
The Fair Tax really does seem fair to those who are asked. It's flat, necessities are not taxed, and it's very easy to understand. You add 29.87% to every taxable shelf price so that 23 cents of every dollar you spend is tax.
Under our income tax, it's really easy to cheat... just underreport income or overreport expenses and you've cheated- liklihood of being caught is low. Under then nrst, it would take two people colluding to evade. Further, about 80% of all retail transactions go thru 25% of retailers, making nenforcement much more effective and efficient...the chances of getting caught are obviously much higher. Would K-mart risk it's life to save you $75 on a set of tires? No. Joe's Neighborhood Tire Barn may risk it - but there are comparativley few transactions thru Joe's.
Take a look at FAQ- it's short and to the point.
Under the FairTax, you pay no payroll taxes on charitable contributions. Therefore the FairTax would actually benefit charities.
Seriously, the only part of my taxes that I don't mind paying go to the military. I figure I'm getting good value for my money there.
VEry good point, MightyQuinn. THank you.
It means the amount of money available to give (or anything, for that matter) will no longer be decreased by payrol taxes or income taxes. :0)
However, the assertion is not baseless as your post connotes IMO.
Your first point, that an individual could present a falsified sales tax exempt form, is clearly true. But that is the case already today. WHile the nrst would not remove all chance for an individual to cheat alone, it is also the case that it becomes more difficult to do so. A sales tax exempt form can be forged or borrowed to be sure - enforcement of sales taxes is just as agressive as for income tax, and under an nrst the enforcement becomes much easier. So it doesn't seem to represent much of a change. Nevertheless, it is obviously true that this does and will always happen to some degree. Maybe we could meet in the middle on that one.
The second point, that a retailer may collect but not remit the tax, is possible too. But the retailer would then forfeit his portion of the collections - which would likely be insignificant on one sale but may be substantial in aggregate. And again, with enforcement being so much more efficient, it is much more likely that they would opt to not take the chance. But again, you are correct that this is a possible scenario - that also exists today. There are bagillions [mathematician's word for lots :0)] of retailers that charge full price for their product/service but who short the income tax man.
Anyway, good points, imo.
I know a person who has a legitimate business who uses his sales tax exemption cert to evade the 6% state sales tax. If the stakes were raised to 30%, I suspect that many people would create a 'business' out of their hobby. There would be significantly more legitimate sales tax exemption certs out there and they would be used fraudulently.
No jurisdiction in the world has a 30% sales tax. Evasion prohibits it.
The way the article is written (and the way sales tax proponents present the idea) is misleading. As the article says, the government gets 23% of every dollar you spend. Your $100,000 house would cost about $130,000.
23% of $130,000 is about $30,000, leaving $100,000, the cost of your house.
Unlike today the average person must earn about $132,000 gross, to pay for a $100,000 home after the income taxes and FICA on his wages.
| Effective Total Federal Tax Rate (Percent of gross income) | |||||||||||
| Income Category | 1977 | 1979 | 1981 | 1983 | 1985 | 1987 | 1989 | 1991 | 1993 | 1995 | Projected 1999 |
| All Families | 22.8 | 23.4 | 23.5 | 21.4 | 21.8 | 22.6 | 22.5 | 22.6 | 23.5 | 24.7 | 24.2 |
Data from IRS collections statistics and The Bureau of Economic Analysis as compiled in tabular form by the Congressional Budget Office.
http://www.cbo.gov/showdoc.cfm?index=1545&from=4&sequence=0
Ooops! nevermind
What about the "ebedded taxes" he pays on products he currently buys? Isn't that what you guys keep harping on?
I don't kow who "you guys" is and I haven't seen any "harping". What a whiner post.
Anyway, it is obviously true that everyone who buys anything under our current system IS paying the hidden income tax, payroll tax, and compliance costs of the entities involved in production. It would be stupid to ignore this obvious fact.
My take on what's been said is that under our current system, drug dealers pay NONE of their own taxes. They just pay the same premium we all pay. All us legal folks pay ALL of our own taxes. But everyone pays the embedded hidden tax premium though.
So the point being made is that drug dealers don't pay their own share taxes. But duh they pay the hidden, embedded taxes at the supermarket just like we all do.
Under an nrst, they'd be paying their own tax, not simply paying the premium we all pay on every purchase.
Drug dealers (ie illegal economy folks) don't pay their taxes. Like the rest of us, they do pay the hidden tax premium in prices.
So the nrst would capture their full share and would no longer allow them to skip on their share of federal taxes for roads, national defense, social security, etc.
In a drug sale, the drug dealer does not pay income taxes today. He would not pay sales taxes under the "Fair Tax". The drug sale escapes taxation because it is part of the underground economy.
When the drug dealer buys a car, the producers of the car currently pay the income tax (even though the dealer paid for the car from the proceeds of his illicit activity). Under a sales tax, the seller collects and remits the sales tax. Under either system, the legitimate car sale gets taxed.
Legitimate transactions get taxed under either system. Illegitimate transactions do not get taxed under either system. Noone has ever given me an example where this does not hold true.
You have got to understand that both an income tax and a sales tax depend primarily on the honesty of the seller. Under an income tax, we must depend on the honesty of the seller to declare his income. Under a sales tax, we depend on the honesty of the seller to declare his sales. Income and sales are very closely linked. If an unscrupulous seller won't declare one, it is unlikely he will declare the other.
In a drug transaction, the dealer will not declare his income nor his sales. This illegal transaction will always escape the taxman.
This is trivially obvious and is not the issue being discussed.
The issue being discussed, irrespective of your efforts to frame it otherwise, is that under our current system, illegal folks only pay the hidden tax premium - which represents producer's taxes to pay for roads, national defense, social security, etc. Everyone pays that premium - that's our VAT system. However, illegal folks don't pay their own taxes for roads, national defense, etc. Under our current system, illegal folks only pay a fraction of the taxes they should be paying...that being the part made up of hidden business tax costs....which we all obviously pay.
Under an nrst, illegal folks would not be able to skirt nearly as much tax. Of course illegal trasactions aren't taxed... it would be stupid to think one would report an illgal activity! But the illegal folks will consume just as much as legal folks, meaning they'll pay as much tax as legal folks :0). The drawback (if you see it that way) is that the government would be earning reduced tax revenue due to non-reporting of illegal retail purchases.
So the assertions made that the nrst captures more of the underground economy than our current system rings true IMO.
Comments?
"Fair Tax" is indeed the actual name of the legislation. Were you not aware of that?
The illegal folks (which includes drug users) would not consume the same as legal folks. By your own admission, drug users would not pay sales tax on their drug purchases.
Guess what? The cumulative consumption of drugs on which sales taxes are not paid will be precisely equal the cumulative income of the drug dealer on which income taxes are not paid.
The sales tax is no better at capturing the underground economy than the income tax. Why is that so hard to understand?
Of course they won't consume exactly the same as legal folks! Good grief.
However, it can be easily argued that those illegal kind of folks will consume more taxables than us legal folks. They like new cars, fancy clothes, expensive jewelry, etc... all of which they'll pay tax on.
Guess what? The cumulative consumption of drugs on which sales taxes are not paid will be precisely equal the cumulative income of the drug dealer on which income taxes are not paid.
Illegals currently ONLY pay the hidden tax premium and do NOT pay their own income and payroll taxes. Hence they do not pay the full measure us legal folks pay. Us legal folks pay the hidden tax premium AND income and payroll taxes.
Under the nrst, ALL tax is paid on consumption. Since you consume regardless of the origin of your income, all individuals will pay their share.
Under the income tax, illegal folks only pay part of their taxes.
Under the nrst, illegal folks will pay all of their part of taxes.
Hence the nrst captures the full measure of tax from illegal type folks (excepting the obviously unreported illegal transactions, which are not taxed now either).
Since under the income tax, not all of illegal folks' taxes are paid and under the nrst all of the illegal folks' taxes will be paid, then it is easily concluded that the nrst does a better job at capturing taxes from illegal type folks.
Why is that so hard to understand?
The sales tax is no better at capturing the underground economy than the income tax. Why is that so hard to understand?
It is certainly no worse than the the income/payroll tax system. In fact one can expect the "underground economy" to actually be reduced as many of the activities of that "underground economy", that to day are tax evasive will no longer be. Sales of used products for one(e.g. antiques, junky yard sales, used clothing and other items, etc.) are not taxed under the NRST, Doing any contract work, or selling products to retail businesses or supply to manufacturing will not be taxed by the NRST.
With many legitimate means of earning livings in ways that do not invoke tax reporting or remitting requirements available there is less reason to risk endeavors that do cross the line.
As importantly, the potential for gain from tax evasive behavior is actually less under the NRST with a maximum marginal rate of 23% as opposed to more than 40% marginal rates of the income/payroll tax system.
And as has been point out many times, the risks of detection are increased in the retail sales sector where there are 90% fewer collection points to be monitored and generally require more than one individual participating in the evasion, as compared to the income tax where merely not reporting cash transaction is sufficient to evade the tax with very low probablity of being caught out.
With potential for less gain and higher risk, and clear lawfull alternatives to NRST involvement, one can reasonably expect that tax evasion will decrease under the NRST from the more than 15-20% levels the IRS admits to under the current tax system.
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