I'd have to observe that the John spending money on the hooker (which may be a transaction but I'd not call it a legal one) is certainly not going to cause her to report that as income. The only tax revenue revenue derived from this downstream side of the transaction is the small amount that represents the profit on the portion of her retailer's costs (and thereby her price) that have been inflated by embedded tax effects.
The difference is that the IT captures money from the underground economy only indirectly by the retailer's portion of increased IT due to the embedded tax effects - however much those are - and not at all directly.
With the FairTax, the taxable transaction captures 23% of the sale as sales tax - a greatly larger sum not adressed by the present system.
And I repeat again (since you seem to have missed it and offer that erroneous refrain again) - no one is saying that the illegal transactions themselves are taxed but that the FairTax picks up far more in tax revenue than the present system.
pigdog wrote:First, I think you underestimate the total tax revenue downstream. Most of the price of anything the hooker purchases is ultimately reported as income by someone. Let's say the hooker gets a really nice hair styling with part of her ill gotten gains. It's true that the owner of the salon only reports a small marginal profit on the transaction and only pays income taxes on a small portion of the total. But, if you look a little further, you'll find that many of the "cost of operation" expenses that the salon owner doesn't pay taxes on are reported as income further downstream. The salary/wages of the employees that perform the shampooing, hair cutting and styling are reported as income and taxed. The same for the cleaning service that cleans the salon every night. The owner of the building reports the rent as income and pays taxes on it. The electric company and phone company report the utility bills as income and pay taxes on that. There's not much in the price of anything you buy that isn't ultimately reported as income by someone and taxed. That's why the "embedded taxes" in the cost of things is in the 20-30 percent range. Because the typical tax rate is in that range and virtually every penny of the price of anything you buy is ultimately reported as income by someone.
I'd have to observe that the John spending money on the hooker (which may be a transaction but I'd not call it a legal one) is certainly not going to cause her to report that as income. The only tax revenue revenue derived from this downstream side of the transaction is the small amount that represents the profit on the portion of her retailer's costs (and thereby her price) that have been inflated by embedded tax effects.
pigdog wrote:And, conversely, under the alleged "fair tax" only captures money on the upstream side indirectly due to the fact that the buyer's income was derived at some point from the sale of taxable goods and services. In most cases, under the alleged "fair tax," the john got to keep all of his paycheck and pays no taxes on the money he used to pay the prostitute. So, if you only look that far, the alleged "fair tax" misses a lot of revenue on the upstream side.
The difference is that the IT captures money from the underground economy only indirectly by the retailer's portion of increased IT due to the embedded tax effects - however much those are - and not at all directly.
I'll admit that if you only look slightly downstream, the alleged "fair tax" looks a little better. But if you only look slightly upstream, the alleged "fair tax" isn't as good. Because most people earn their money from jobs that pay wages or salaries. In the income tax system, the john is likely to be paying her with dollars that were reported as income and taxed. Under the alleged "fair tax," he probably pays no taxes at all on the dollars he used to pay the prostitute.
Again, if you dig deeper, you'll find that the money the john used to pay the prostitute ultimately originates in the sale of taxable goods and services, and there is revenue collected on the upstream side. But it's from "embedded sales" and "embedded taxes" within the john's income stream rather than from the john paying the taxes directly.
The bottom line is, if you look at the overall economy in it's entirety, both the income tax and the alleged "fair tax" fail to tax the "underground economy." The difference is in how they fail and which side of the illegal or tax evading transaction has the most missed tax revenues. With the income tax, the upstream side has more visible tax compliance and greater visible tax revenues. With the alleged "fair tax", the downstream side has more visible tax compliance and greater visible tax revenues. But if you dig deeper, the tax revenues are actually collected on both sides of the illicit transaction. Under the income tax system, the virtually all of the money spent by the prostitute is ulitmately income to someone. Under the alleged "fair tax," virtually all of the money earned by the john originated from the retail sale of something(s).
Focusing only on one side of the transaction and saying one system is better than the other at taxing the "underground economy" is either ignorant or intentionally misleading. If alleged "fair tax" supporters are that ignorant about the underground economy, it makes me wonder what else they've overlooked. If they have to mislead people about the advantages of their system, it also makes me wonder why that system is better.