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Just what types of consumer products do you think will be sold in mass on the black market - houses, cars, groceries, furniture?

Sure. Whatever can be evaded, will be to some degree. Like I asked before, why do you think the blackmarket for cigarettes is greated that the blackmarket for candybars?

Cato has a paper discussing this.

When governments try to extract tax revenue from the economy, they foster an array of responses from citizens who have an economic incentive to avoid the tax. Higher tax rates create even greater incentives for avoidance, evasion, and black-market activity. New York City's experience with cigarette taxes vividly illustrates these problems.

New York's high cigarette taxes have spawned a massive black market that has diverted billions of dollars from legitimate businesses and governments to criminals. More troubling than the financial losses is the crime associated with the city's illicit cigarette market. The enormous profits that can be made smuggling cigarettes into New York have lured smalltime crooks, mobsters, street gangs, and terrorists into the racket. Those criminals have engaged in a host of violent activities, including murder, kidnapping, and armed robbery, to earn and protect their illicit profits. Such crime has frustrated law enforcement efforts to curtail it and exposed regular citizens, such as truck drivers and retail store clerks, to violence.

The failure of New York policymakers to consider the broader effects of high cigarette taxes has been a mistake repeated across the country in the stampede to maximize taxes on this demonized product. Too often, policymakers do not consider those effects in the erroneous belief that people do not respond to government-created economic incentives. The negative side effects of high cigarette taxes in New York provide a cautionary tale that high tax rates have serious consequences — even for such a politically unpopular product as cigarettes.

Cato has a paper discussing this.

When governments try to extract tax revenue from the economy, they foster an array of responses from citizens who have an economic incentive to avoid the tax. Higher tax rates create even greater incentives for avoidance, evasion, and black-market activity. New York City's experience with cigarette taxes vividly illustrates these problems.

So do others

Tax Evasion: The Underground Economy

The FairTax and Tax Evasion
Opponents of the FairTax like to assert that a federal sales tax would increase tax evasion. It is more likely, however, that the FairTax would increase tax compliance while reducing compliance costs at the same time. It is impossible to argue in good faith that the current approach is doing its job since the problem is getting worse with the passage of time despite major and ever more intrusive attempts to address the problem.

Estimated Tax Gap by Source[14] for 1981 and 1992, in Current Dollars (Dollars in millions)
Description	1981 Tax Gap Amount	1992 Tax Gap Amount
Individual filers Wages and salaries	$2,378	$1,919
Interest	1,969	1,891
Dividends	2,075	2,142
State tax refund	127	102
Alimony	124	253
Capital gains	1,822	11,535
Form 4797	217	1,264
Pensions and annuities	456	144
Taxable unemployment	107	388
Farm income	2,350	1,909
Partnership income	2,755	2,246
Small business (S) corporation	912	729
Estates and trusts	49	73
Rents and royalties	2,012	4,481
Non-farm sole proprietors	18,714	30,173
Other income	4,366	3,465
Taxable Social Security	0	44
Adjustments to income	752	694
Deductions	3,540	3,889
Exemptions	1,844	2,224
Credits	1,313	1,274
Math errors	487	1,521
Individual non-filer tax gap	5,231	10,233
Individual remittance gap	8,300	11,400
Total individual tax gap	$61,900	$93,994
Small corporation tax gap	4,461	6,999
Large corporation tax gap	8,638	23,716
Unrelated business income gap	56	218
Fiduciary tax gap	111	202
Corporate remittance gap	800	2,000
Total corporate tax gap	$14,065	$33,135
Total tax gap	$75,966	$127,129

Some of the problems regarding the underground economy that exist under the income tax would remain under the FairTax, particularly those involving cash transactions made in the illegal economy or with the explicit intent of evading taxation. However, as the costs of compliance shrink and the perceived fairness of the tax system increases, some of the hostility to the tax system will decline. People who are in noncompliance because they perceive the present system as unfair or illegitimate may choose to comply with the FairTax. Most importantly, because of lower marginal tax rates, the benefit from lawful tax avoidance or illegal tax evasion will be much less at the margin relative to either the present system[15] or competing alternative tax systems, such as the USA Tax or flat tax[16], that have higher marginal tax rates, particularly on wages or self-employment income.[17] Research has confirmed the intuitive relationship between higher marginal tax rates and higher rates of evasion.[18] Lower rates, all other things being equal, imply lower evasion because the benefits from evasion decline while the costs of evasion remain comparable.

Much is made from the fact that a federal sales tax would place the responsibility for tax collection with the retailer, a sector of the economy in which small businesses are better represented. Small businesses are viewed as more likely to evade taxes since the owner, and beneficiary of tax evasion, is more likely to also be responsible for keeping the books and filing the tax returns. While there is, of course, some truth to the proposition that evasion rates among small businesses are higher, it is highly implausible to suggest that evasion would increase under the FairTax. First, those small businesspersons that are inclined to cheat on their sales tax are probably already cheating on their 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 the Joint Committee on Taxation (JCT), small firms only account for 14.9 percent of gross receipts by all retailers, wholesalers and service providers.[19] Since the gross receipts of wholesalers would not typically be subject to tax, the true scope of the small "problem" companies is smaller still. However, sole proprietorships, perhaps the most likely to evade tax under the present system and under the FairTax, are not included in the JCT figures.

Share of Total Gross Receipt by Firms with less than $1 million of Gross Receipts[20] ($ millions, 1993)
Industry	Entity Type	Firm Sales Under $1 mil.	Firm Sales All Firms	Small Share Percent
Retail and Wholesale Trade	C Corp.	116,929	2,663,541	4.4%
Services	C Corp.	91,383	610,438	15.0
Retail and Wholesale Trade	S Corp.	358,566	959,501	37.4
Services	S Corp.	98,721	283,680	34.8
Retail and Wholesale Trade	Partnership	22,938	112,112	20.5
Services	Partnership	30,783	187,588	16.4
Total	Combined	719,319	4,816,860	14.9

Third, the necessary corollary of the tax collection point being concentrated at retail establishments, rather than with individuals or other businesses, is that there are fewer points where revenue agents must concentrate their enforcement efforts. The collection points in the FairTax system would be perhaps 10 percent of those under the current income tax system or other alternative tax systems.[21] Because the number of collection points is so much lower, if enforcement funding is held equal then the audit rate for potential evaders would increase considerably, and the likelihood of them being apprehended is correspondingly higher. In other words, the risk of detection would increase and risk-adjusted cost of evasion would increase. Increased evasion due to the greater concentration of small businesses in the retail sector would be outweighed by greater compliance due to greater simplicity and perceived legitimacy of the tax system, from reduced temptation due to lower marginal tax rates, and from higher risk of detection due to a smaller taxpayer population. Fourth, some small business owners evade taxes because they feel the present system is unfair or overly complex and burdensome, or that they have been wronged by the system. They are much less likely to feel that way about the FairTax. Fifth, and perhaps most importantly, the marginal benefit from evasion will decline under the FairTax since the marginal tax will decline. Thus, the incentive to cheat will decline markedly.

Any one of the 118 million income tax filers can cheat the income tax system today, and a great many do so. Under the FairTax, however, only retailers (about 14 million-tax filers altogether) would be in a position to cheat In addition, the vast majority of retail sales, 90 percent, are made by large firms that are less likely or find it more difficult to cheat. A retailer who cheats under the income tax system has very similar, if not the same financial gain, as a retailer who cheats under the FairTax system. If a retailer under the FairTax system, failed to report taxable sales, the government would lose and the evader would gain by an amount equal to the sales tax on the good or service purchased. In an income tax system, the government loses and the evader gains by an amount equal to the marginal income tax rate times the amount not reported. An income tax evader will see his taxable income go down dollar for dollar, for every dollar of income not reported. Typically, failing to report a small fraction of a business' gross income will be sufficient to drive its reported profit to zero.

Even if, however, we were to make the unlikely assumption that evasion rates would be higher under the FairTax system than under an income tax system, they would have to be much higher to justify the income tax's huge compliance costs (estimated to be over $225 billion in 1996), many of which are incurred by businesses and are deductible as a business expense. Moreover, if compliance proved to be a problem, information reporting along the lines of present law (1099's) could be implemented to facilitate cross-checking by government auditors. These 1099s would reflect the quantity of product sold to retailers. An auditor could then ensure that the retailer's books either reflected a sale of these products or that the products were in inventory. The FairTax requires all businesses (including non-retailers) to keep business records kept in the ordinary course of business that would aid cross checking by government auditors.[22]

Conclusion
Tax evasion will undoubtedly be a problem under any tax system. It is a major and growing problem under the current tax system, despite very substantial efforts and increasingly harsh treatment of the taxpaying public. Almost 40 percent of the public, according to the IRS, is out of compliance with the present tax system, mostly unintentionally due to the enormous complexity of the present system. This breeds disrespect for the tax system and the law, and makes a system based on taxpayer self-assessment less and less viable.

The FairTax is likely to reduce rather than exacerbate the problem of tax evasion. The increased fairness, transparency, and legitimacy of the system will induce more compliance. The roughly 85 to 90 percent reduction in filers will enable tax administrators to address instances of noncompliance more effectively, and increase the likelihood that tax evasion will be discovered. The relative simplicity of the FairTax will promote compliance. Businesses will need to answer one question to determine the tax due: how much was sold to consumers? Finally, the dramatic reduction in marginal tax rates will reduce the gains from tax evasion. If the cost of noncompliance remains comparable (or even increases due to the increased likelihood of getting caught caused by the much smaller number of filers), then both the expected profit from and frequency of tax evasion will decline.

[14] Source: Income Tax Compliance Research, IRS Publication 1415. Gross Tax Gap Estimates by Source of Tax Gap for Tax Years 1981 and 1992, in 1992 Dollars, reprinted in GAO Supra.

[15] For 2000, the 28 percent marginal rate is effective on taxable incomes of $43,850 for joint filers and $26,250 for single persons. The top federal tax rate, of course, is 39.6 percent.

[16] The USA Tax has a top marginal tax rate of 40 percent (actually an effective rate of 32.35 once the payroll tax credit is considered) that takes effect at relatively low taxable income levels. Even a relatively low flat tax rate of 17 percent, plus the 15.3 percent payroll tax, yields a marginal tax rate of 32.3 percent until the Social Security wage base is reached and 19.9 percent thereafter (including the 2.9 percent Medicare tax). At a 20 percent flat tax rate (the beginning rate under the Armey plan), the lowest marginal tax rate is 22.9 percent and 35.3 percent for most middle class wage-earners.

[17] For a particular taxpayer, the marginal benefit from failing to report a given amount of gross receipts under an income tax and a given amount of gross receipts under the FairTax are the same. Under an income tax, the taxpayer will reduce his taxable income one for each dollar not reported. In the FairTax, failing to report sales receipts would also reduce taxable receipts dollar for dollar. Although the problem of falsifying deductions or deducting personal items as a business expense does not arise in the FairTax, the corresponding problem in the FairTax is using a business to attempt to purchase personal goods and services on a tax-exempt basis.

[18] See, e.g. "Estimating the Underground Economy: A Critical Evaluation of the Monetary Approach", Peter S. Spiro, 42 Canadian Tax Journal 1059–1081 (1994); "The Underground Economy in the United States: Annual Estimates, 1930-80", Vito Tanzi, 30 International Monetary Fund Staff Papers 283–305 (June 1983).

[19] IRS Statistics of Income, reported in "Impact on Small Business of Replacing the Federal Income Tax," Joint Committee on Taxation, April 23, 1996, JCS-3-96, pp. 109–127.

[20] Ibid.

[21] See note 3, supra.

[22] State governments, particularly with respect to tax due on out-of-state purchases by businesses, currently use this method. State sales taxes are, unfortunately, often applied to business inputs.

why do you think the blackmarket for cigarettes is greated that the blackmarket for candybars?

Because the taxes on the two items are unequal. If the taxes were equal on both items, then you'd probably see blackmarkets for both proportional to their respective legal sales.

Thanks for making the argument in favor of a single-rate system.

"Just what types of consumer products do you think will be sold in mass on the black market - houses, cars, groceries, furniture?"

"Sure. Whatever can be evaded, will be to some degree."

I'll take your answer to mean yes to all of the above. Apparently, you believe a black market in real estate will develop. As if you will be able to buy real estate with no audit trail and no means of enforcement. And you think that you will be able to buy NEW autos (which are, after all, the only ones would be taxable) on the corner, right? And other black marketers will be setting up kiosks out in the shopping center parking lots to sell groceries?

Even for you, this represents a stretch in logic that is incredible. You apparently completely missed the point that the overwhelming proportion of retail sales occurs at the level of the mass retailers, whose risk/reward ration wouldn't make collusion when it comes to this evasion smart.

Are you sure you don't want to change your position?