Dear Carry_Okie,
"This is oxymoronic. There's already a tax on marijuana, how well do they do at collecting that? There are already any number of taxes due from the underground economy that don't go collected. What makes you think that the same people won't buy off the black market?"
Well, the NSRTers will argue that, hey, at least when the drug dealer goes and spends his ill-gotten gains, he'll have to pay the NSRT. Well, to some degree, that's true, but it leaves out a critical part of the transaction chain.
I don't know about the buying and selling of illegal drugs, so I'm going to translate this to a part of the underground economy with which I'm familiar.
I have friends who hire folks off the books to do stuff like clean the house, be a nanny to their kids, or do landscaping for their homes. Let's take the case of the nanny.
We have some friends who have a nanny for their children, a woman whom they pay $10 per hour. They pay no payroll taxes, withhold no income taxes.
Under the new system, this woman will still get her $10 per hour, but NOW SHE'LL HAVE TO PAY THE NSRT ON HER PURCHASES! It's a MIRACLE! We've closed down the underground economy!
Well, no, not quite. Under the new law, Little Miss Nanny should be charging the 30% NSRT on her services to my friends, taking here income, and then spending it personally and paying the NSRT on her purchases. Thus, we're missing half the taxation that should be going on, here.
"Oh! But we're only missing HALF the taxation," say the NSRTers.
Yeah, I think that's true. I agree with that analysis.
"Under the old law, we were missing ALL the taxation," they say.
No, that part isn't true.
Under the new regime, my friends will be paying for this woman's services with untaxed dollars, and will not be paying any sales tax on those services.
But currently, under the new law, my friends are paying for the services with AFTER TAX dollars, not untaxed dollars, and thus, even though this woman is paying no income taxes, TAXES WERE COLLECTED ON THE MONEY BEING USED TO PAY HER.
In the current situation, half the tax transactions that should be occuring ARE occuring, just as it will be under the new law.
As well, because this woman, even on a full-time bases, is in the very lowest tax bracket, and my friends, God bless them, are in the very highest tax bracket, because it is their side of the transactions that are taxed, and their rate is higher, the "half" of the taxes that are paid are considerably greater than the "half" that are unpaid.
However, under the NSRT, the half that is unpaid would be at least as large as the half that is paid.
All that's being done with the NRST is we're moving the point of taxation from the "front" of their money - when they receive their income, to the "back" of money - when they spend their income. In this example, NRSTers miss that the folks with the nanny are paying their taxes at the "front" of their money, on their income, even though the nanny's "front" of her money goes untaxed.
Under the NSRT, the "back" of the family's money will go untaxed, but the "back" of the nanny's money will now be taxed.
Looks like a roughly even swap to me.
Dimples, I'm pinging you because: you're a lot more knowledgeable about how to apply statistical analysis to these questions, so if I'm making an error, you can perhaps point it out to me; I think you may know much better the appropriate terminology to better express what I'm saying, and may choose to do so.
sitetest
Personally, I've never bought the "underground economy" argument for the reasons you point out. The only thing I will say is that under an NRST, "undocumented workers" (i.e., illegal immigrants) will pay the full NRST rate on their purchases as everyone else, but will not be eligible for the FCA. This means that the illegals' effective tax rate equals their marginal tax rate, whereas the typical legal resident or citizen's effective tax rate is significantly lower than the marginal rate due to the FCA.
Both schemes have underground potential. Some money in either scheme will never pass through an "in the game" tollbooth. Only money transferring into the underground is taxed by the income tax and only mony transferring out of the underground it taxed under the FairTax. Money that stays IN the underground is not taxed under either scheme.
Unfortunately, it is impossible to predict how the underground will evolve to thwart any new scheme of taxation, just rest assured that it will. I believe the best working assumption to make now is that the magnitude of lost tax potential in each scheme is about the same. I can't prove that, but no one else can prove that any new scheme will be significantly better (or worse.) You just can't run the experiment (a problem with most predicive economics.)
What!?!? An under the table nanny is going to start charging 30% more? Are you kidding?
What makes you think your friends who hire her are going to be stupid enough to pay her? Unless she produces a receipt, which she won't do unless she has a real business, which puts her on the radar of the state collection agency, she won't be raising her prices. That's a silly example. This is the open market, remember?