Exactly, and it's this amount that will decrease due to higher sales tax evasion/avoidance
This higher sales tax evasion/avoidance is what isn't accounted for in the FairTax rate.
Sorry, the amounts that are reported into NIPA, are reported from obviously compliant sources under even the poor enforcibility of the current federal income tax system.
Most of the IRS noncompliance tax gap is due to factors such as EITC fraud, fraudulent and erroneous deduction claims, fraudulent trust and income sheltering schemes, non reporting of international income etc. which are all are part and parcel to the complexity of the income tax system and not a factor in an NRST.
Where you have any complex tax system with large numbers of filers in relation to the bureaucracy that tries to administer it you have a disaster, the EU experience with its own complex of tax systems is a clear example of how countries with similar tax rates have highly divergent evasion rates and underground economies that result more from complexity and high bureaucratic burdens than rates of taxation. Countries with generally 20% sales tax rates exhibit both high and low compliance and evasion rates related mainly to complexity and bureaucratic burdens on small businesses, than to the tax rates imposed upon them.
We can expect the above factors to be eliminated where non-compliance is concerned rather than increased with an NRST in place and reduced where the arise as a function of confusion, and complexity of the income tax system in place.
Of more interest, of course, here in the US, IRS non compliance measures don't begin to touch the fraud and hiding of taxable income under the 40% income plus self employment tax rates hitting self employed transactions that are the core evasion under the current tax system.
A single proprietor or small business operating off the books to avoid the redtape and high rates doesn't report sales or income to anyone, especially the single proprietor not bothering to file at all which does not show up in any of the IRS noncompliance data or NIPA for that matter, and will continue in the same operational pattern as he does under the current system.
The transactions that arise from core evasion are not simply not tracked in the NIPA, or by the IRS and those amounts will continue to not be reported as sales or income under any tax system thus no change to be expected there and are not a part of the the taxbase measure for the NRST.
As far as the compliance tax gap measures of the IRS goes, The information comes from analysis of its ongoing litigations and audits of tax returns, relying on recorded and tracible information associated with filing of income tax returns and not in any way related to retail sales taxes and the features of an NRST.
No filing or reporting, guess what it isn't included in the NRST taxbase for calculating the tax rate.
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IRS’s Comprehensive Approach to Compliance
Taxpayer compliance is a multi-faceted measure. One theoretically appealing way to define taxpayer compliance is to consider three distinct types of compliance: payment compliance; filing compliance; and reporting compliance.2 These three mutually exclusive and exhaustive measures together provide a comprehensive look at overall taxpayer compliance, which would feed into estimates of the Tax Gap (the difference between taxes paid and taxes owed for all federal taxes and all taxpayers). *** SNIP *** There are three characteristics of the Tax Gap Map worth noting. First, definitive data exists only for a few component items, primarily the estimates of payment compliance and those for reporting compliance for the Earned Income Tax Credit and for Duplicate Dependents.4 The other estimates all represent projections from earlier studies, primarily the Taxpayer Compliance Measurement Program (TCMP) studies done by the IRS in the 1980s and earlier. Second, these projections from dated compliance studies cannot possibly account for all the changes (tax and non-tax) that have taken place over the passing years. Therefore, the estimates should be viewed as rough guides to the magnitude of the tax gap components, despite the seeming precision of the estimates. Third, despite the imprecision of the estimates, it is likely that the largest components of the tax gap are noncompliance with the reporting requirements for the individual income tax and employment taxes. This should not be surprising given that these are the two largest components for federal tax revenue.5 There are very few instances of recent reporting compliance estimates, which are based on specific, targeted studies the IRS has conducted. One example is the Earned Income Tax Credit, where the IRS has conducted fairly reliable compliance studies for tax years 1997 and 1999. 6 In general, though, the most recent comprehensive studies on reporting compliance relate to tax years the late 1980s. *** SNIP *** The three measures provide different views of the compliance puzzle, and when placed next to one another provide a comprehensive picture of the overall level of compliance. The filing compliance measure tracks the percent of required returns that are timely filed. The reporting compliance measure tracks the percent of true tax liability that is correctly reported. The payment compliance measure tracks the percent of reported tax that is timely paid. |
The major factors there have much to do with tax system complexity, EITC and child tax credit scams and taxpayer error as it does fraudulent deductions on the filed tax returns that are submitted:
| refer ==> IPI Publication Full Text - IPI Policy Report - # 168 Simplifying Federal Taxes: The Advantages of Consumption-Based Taxation Noncompliance Tax complexity leads to noncompliance with the tax system, whether through confusion or a desire to evade taxes. The General Accounting Office estimates that the government loses about 17 percent of income tax revenues to noncompliance, or about $200 billion annually.59 [GAO, “Reducing the Tax Gap,” GAO/GGD-95–157, June 2, 1995 page 2] Former IRS commissioner Shirley Peterson thinks that confusion plays an important role in noncompliance: “A good part of what we call non-compliance with the tax laws is caused by taxpayers’ lack of understanding of what is required in the first place.”60 The JCT notes that for other taxpayers, “complexity can foster multiple interpretations of the law and aggressive planning opportunities. In addition, taxpayers may consciously choose to ‘play the audit lottery’ by taking a questionable position on their tax returns, in the belief that complexity will shield them from discovery.”61 |
The IRS noncompliance data of the IRS shows only a tip of a very large undergound iceberg, only hinted at by the growing tax gap of IRS measures.
I. The Scope of the Tax Evasion ProblemFormer IRS Commissioner Charles Rossotti (2002) estimated that in a given year, the IRS assesses almost $30 billion of taxes that it will never collect. This is not theoretical tax evasion. The $30 billion represents underpayments of tax that the IRS has identified, but cannot collect because its staff is spread so thin. Rossotti estimated that it would cost about $2.2 billion to collect that money. If you accept that estimate, the IRS could net almost $28 billion from tax fraud and errors that are identified and ripe for collection. Assuming that the amount grows with GDP, collecting on assessments would, over the next decade, cover the entire cost of the new prescription drug benefit under Medicare (although not the superfluous new savings accounts in the House version of the bill). It is more than the entire cost of the Jobs and Growth Tax Relief Reconciliation Act of 2003 as scored by the JCT (although not enough to finance the extension of the myriad expiring provisions). It is serious money. But it is tiny compared with the entire "tax gap"—the IRS's estimate of total taxes due but not collected. The IRS estimated that $232 billion in taxes were due in 1998, but never collected. (See Figure 1.) These estimates are highly uncertain because the IRS stopped systematically measuring tax compliance for all but working poor people after 1988, but it suggests that tax compliance is a huge problem, and it has been growing. According to Commissioner Rossotti, "Despite significant improvements in the management of the IRS, the health of the federal tax administration system is on a serious long-term downtrend. This is systematically undermining one of the most important foundations of the American economy." Why is the gap growing? To begin with, the number of tax returns has been growing much faster than the IRS staff. This has occurred for several reasons. There are more head of household and single returns and fewer married filing joint returns because couples are marrying later, if at all, and the divorce rate is rising. Also, many more children are filing tax returns. (Plumley and Steuerle, forthcoming) Moreover, after steady growth in compliance resources through the 1980s, IRS staff dedicated to compliance and enforcement plummeted in the 1990s. Between FY 1992 and 2001, the IRS workload increased by 16 percent while its staff declined by 16 percent. Field compliance personnel fell by 28 percent—more than 8,000 FTEs—between FY 1992 and 2002. The effect on examinations is even more striking. According to the Internal Revenue Service (2001), the number of field examiners fell by almost two-third between 1997 and 2000. The number of collection cases closed fell by nearly half over the same interval. The number of criminal tax cases not related to income from illegal activities fell by more than two-thirds, from 1,498 in 1997 to 409 in 2000. A large part of the problem, according to the Commissioner, is budgets with "unrealistic assumptions about such items as pay raises, inflation and other mandates, including specific mailing and notification requirements." In the late 1990s, a key factor was the taxpayer bill of rights, which required the IRS to answer its telephones and focus its efforts on "customer service." The better service, while surely welcome, came at the expense of audit activity. This decade, Congress has twice mandated that the IRS interrupt its ordinary operations to mail out springtime checks to most taxpayers—advance payments on the low-end tax rate cut in 2001 and on the child credit increase in 2003. Without a supplemental appropriation to pay for additional staff, the staff managing these huge mailings must come out of existing employees, typically compliance staff. Finally, the opportunities for evasion have been growing. While the overall number of returns grew by 16 percent, the number of tax returns reporting more than $100,000 of income grew by 342 percent. These people who face the highest marginal tax rates have the most to gain from tax evasion, and the most opportunities to engage in it. Commissioner Rossotti reported that "enormous amounts of money ... flow through 'pass-through entities'—such as partnerships, trusts, and S-corporations," which are ideally suited to hiding income. In tax year 2000, pass-throughs accounted for 4.8 million tax returns with over $660 billion of income. *** SNIP *** ConclusionNoncompliance is a serious issue that undermines the tax system and carries a huge cost in terms of higher taxes on law-abiding citizens, fewer government services, and more government debt. The IRS is taking a number of important steps to improve tax compliance. However, the IRS's preoccupation with EITC recipients seems like a poor use of scarce audit resources, is likely to undermine the EITC program, and is unfair. It would be better to address the endemic problems in the income tax at all income levels. EITC compliance, and compliance in other areas, could also be improved by simplifying the tax law. Figures
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