Posted on 02/20/2006 3:30:35 PM PST by Bigun
Written by Jan Larson
Sunday, February 19, 2006
The Internal Revenue Service reported [1] last week that $345 billion (not a misprint) in taxes owed for 2001 has not been collected. Not to worry, the report also indicates that IRS enforcement efforts will recover approximately $55 billion of this “tax gap.” Bully for the IRS.
Even if the IRS is successful in recovering the amounts they seek, there is simply no way that a $290 billion shortfall can be justified regardless of how it is spun. There are several reasons why taxes rightfully owed are not collected. Many taxpayers underreport income and/or claim undeserved deductions. In other words, a lot of people cheat on their taxes. Is anyone surprised?
Another factor that significantly affects tax compliance is the complexity of the tax code. According to a report [2] from the Americans For Fair Taxation [3], the federal tax code, rules and IRS rulings comprise more than 60,000 pages. While complexity undoubtedly leads to some paying more than they rightfully owe, that complexity also results in billions in unpaid taxes.
The report also indicates that individuals and businesses spent over six billion hours at an estimated cost of $265 billion dollars attempting to comply with the maze of tax rules and regulations. This is equivalent to a workforce of over 2.8 million people spending the entire year doing nothing but tax compliance.
To cover the uncollected taxes, the 130 million U. S. taxpayers are effectively subsidizing the tax cheats to the tune of over $2600 each. In other words, if the cheaters were prevented from cheating, the average taxpayer would see reduction in his or her tax bite by over 30%.
If the tax gap and compliance costs were in and of themselves not sufficient reason to scrap the tax code, the tax code also hurts the U. S. in other ways. The income and payroll taxes ostensibly paid by businesses (but are in fact simply passed along to consumers) make U. S. products less competitive on world markets. This leads to job losses in the U. S. and, as we also saw last week, record trade deficits. The complexity of the tax code also enables politicians to reward and punish via the tax code. This is probably the single worst aspect of the U. S. tax system.
The sheer lunacy of a tax system that fails to collect billions owed, enables political manipulation, hurts the economy and in general works against the taxpaying public is astounding.
There is a solution however. It is a solution that would eliminate individual compliance requirements and make April 15 just another day. This solution would greatly reduce business compliance costs and similarly reduce the size and scope of the IRS. This solution would lead to job growth and economic expansion. This solution would eliminate most of the opportunities for tax cheats and political manipulation. The solution? The Fair Tax.
The Fair Tax would eliminate all income and payroll taxes and would replace them with a national sales tax paid on the retail purchases of new goods and services. The Fair Tax protects low-income individuals and families by rebating taxes paid up to the poverty level.
The first reaction by many people to the idea of a national sales tax is that prices of goods and service would go through the roof. Under the Fair Tax, this is not the case. Consumers are already paying for the corporate income and payroll taxes embedded in the price of virtually all goods and services. It is estimated that these embedded taxes average approximately 22% of the retail price of goods and services. Make no mistake; you are paying these hidden taxes.
Under the Fair Tax individuals would incur no compliance costs and businesses would remit Fair Tax receipts similarly to the way state sales taxes are remitted today. No more armies of lawyers and accountants to figure out IRS regulations. The IRS (or some similar agency) would need to ensure compliance from just the approximately 25 million businesses instead of 155 million businesses and individuals, as is the case today.
Maybe most importantly, the Fair Tax would eliminate the patently unfair manipulations of the tax code that Congress uses to hand out favors to wealthy constituents and lobbyists. The elimination of the incentive and ability to tinker with the tax code would go much farther toward making members of Congress more “ethical” than any other type of reform.
The Fair Tax has been introduced in both the House (H. R. 25) and Senate (S. 25). The House version already has 48 cosponsors. The Americans for Fair Taxation estimate that it would require just 3000 active supporters in each congressional district to make the Fair Tax a reality. Each of the 435 districts represents approximately 300,000 taxpayers. That means that if just one percent of taxpayers became vocal supporters of the Fair Tax and took the time to write and/or call their representatives in Washington, the Fair Tax could become law.
The Fair Tax would be the most significant tax reform since the Boston Tea Party. Don’t leave this reform to others. Take a few minutes to let those in Washington know that the time for the Fair Tax is now. Think about that as you pore over your 1040 this year.
[1] http://www.irs.gov/newsroom/article/0,,id=154496,00.html
[2] http://www.fairtax.org/pdfs/Tax_compliance_facts.pdf
About the Writer: Jan A. Larson is currently employed in private industry in Texas. He holds a bachelor of science degree from the University of Nebraska, a master of science degree from the University of Kansas, and an MBA from Colorado State University. jan@pieofknowledge.com.
You overlook one important factor.
Only a benevolent dictator would institute the fair tax. You can kid yourself all you want about grass roots stuff. Americans are not nearly PO'd enough to even make a slight stab at it.
Maybe you want to put your money into government controlled accounts. Not I.
Such an account would keep the Government OUT of your pocket by making that money NOT liable to a 20% additional Federal tax bite when you spend it.
How would the Government "control" such an account when its sole purpose is to have the money in it not taxed an additional 20% after it has already be taxed up to 39%?
At the top tax bracket, here is the arithmentic without such an account:
You earn $100,000 at the top tax rate and you end up with $61,000.
You then pay an additional $12,200 for 20% Federal sales tax when you spend that saved $61,000 in post-tax money.
The total Federal tax would end up at $51,2000 in taxes on $100,000 in earnings.
To jump from paying a 39% Federal tax rate to a 51.2% Federal tax rate just to say that your money was never in a "Government controlled" account is just cutting off your nose to spite your face.
You might as well refuse an IRS refund check since that money was tainted by being in a "Government controlled" account.
Any reasonable money manager, which is what most folks with any wealth use, accomplishes that much.
Under the Fair Tax system, whatever income tax era post-tax money you had left over after all the money manager gymnastics were performed is going to get socked with an additional 20% once you spend it.
Are you serious? Don't you know that only a handful of colonists enabled the Revolution? What are you talking about? I have seen thread after thread about the loss of our Constitution and the loss of our Bill of Rights and how maybe, maybe there should be the blood of tyrants on the tree of liberty. Well here we have the chance for the greatest transfer of power from Washington to the people since the Revolution and all you can say is that Americans are not nearly PO'd enough. Shame on you.
Don't you know that only a handful of colonists enabled the Revolution?
Make that 22%. When 22% are willing to fight over it get back to me.
You're right - see my #35.
My wealth is what my wealth is and each level of wealth has its own peculiarities and issues.
It is my income bracket that paid 34.27 percent of Federal personal income taxes in 2003 while demagogues like John Kerry (who lives on tax free money his wife inherited) specifically singles us out my income bracket as not deserving any tax cut.
Your initial post stated that my concerns were invalid since retirement savings were all in IRA's and 401 K's. Another individual might write to you that your concerns about income taxes is irrelevant as he knows nobody that actually pays income taxes.
I am addressing the very real issues of this proposal as it affects my income bracket.
If my income bracket has specific tax issues associated with it, I will address those issues.
If my income bracket has some sort of adverse psychological effect on you, that is your problem and not mine.
Such an account would keep the Government OUT of your pocket by making that money NOT liable to a 20% additional Federal tax bite when you spend it.
Like I said, any one with a brain using good money management designed to defer taxes has few such assets now. 20% of zilch in such accounts when measured against the much larger portion is not worth the risk or effort. Better to leave such capital invested and draw off only earnings off of it, not drawing down the original capital, which are not double taxed.
How would the Government "control" such an account when its sole purpose is to have the money in it not taxed an additional 20% after it has already be taxed up to 39%?
By changing the tax law to take advantage of all those known and controlled assets just going to waste in a trust in their control, not generating tax dollars for their latest scheme for buying votes from those that have no such accounts.
Remember the screamers paying that 20% or so on their baby's milk and diapers. There's where the votes are, no significant number of votes to count connected with your nest egg, under their control.
At the top tax bracket, here is the arithmentic without such an account:
You earn $100,000 at the top tax rate and you end up with $61,000.
You then pay an additional $12,200 for 20% Federal sales tax when you spend that saved $61,000 in post-tax money.
The total Federal tax would end up at $51,2000 in taxes on $100,000 in earnings.
LOL, if you have locked your taxed earnings into the kind of plan that you are drawing predominately capital out of for consumption, not return to investment making earnings, you have a problem in money management, not with a tax system. I don't feel sorry for that kind of stupidity.
To jump from paying a 39% Federal tax rate to a 51.2% Federal tax rate just to say that your money was never in a "Government controlled" account is just cutting off your nose to spite your face.
Not too worry, my nose and face, seeing as I re-invest capital (not taxed in a retail tax system) and don't run around spending it on my personal consumption. Capital is not exposed to such tax levels nor ever needs to be in a well managed portfolio, previously taxed or not is irrelavent to the issue in a well managed portfolio.
If you have so mismanaged such money as to necessitate consuming your seed corn like that, you have problems much worse than any tax rate.
Three hours a year for one hundred million tax filers is 300,000,000 hours wasted.~ An hour per citizen. I'd say that's pretty good.
That is twelve times as many man-hours as it took to build the Golden Gate Bridge,Imagine how many Golden Gate Bridges we would have if we could just get people to stop watching American Idol. Time does not equal money for most people.
all essentialy wasted on compliance rather than being used for a useful (wealth-creating) purpose.All essentially used calculating their tax burden instead of in front of the TV. If you want time consuming, tell us how much you paid in sales tax last year.
No ifs needed. By including SocSec under the sales tax umbrella, all tie between work & retirement will be broken. The government will not be limited by any actuarial basis on paying the SocSec benefits except maybe by the total revenue. This is just another way to turn the whole thing into a way to steal any savings. If you save anything at all, you will get no SocSec in the future. Is that in the current bill? No, only the incentive to do so is in the current bill.
The changes will be gradual, but inevitable. With SocSec spending tied only to total revenue, politicians will find it far cheaper to buy votes directly (bread & circus type thinking) than through expensive (but usually somewhat useful) public works or defense spending.
You forget that once the FairTax is enacted, politicians are going to stop acting like this and are going to be instead consumed with a sense of fairness and good, and will never again resort to such tactics as class envy, vote buying, and other time-tested political behaviors. It's all in the Fairtax bill, you must not have read it. /s
Yes it will. However, there is already a mechanism in place for state sales tax exempt purchases. You apply for it. You use it for business purchases. I'm sure some will try to use it for personal stuff just like now.
Individuals will not have to keep receipts anymore. That's an improvement IMO.
I just don't see where the Fair Tax advocates come up with the numbers that claim that "embedded costs" assossiated with a "bottom line tax" (income tax) will be less than the "embedded costs" of a Federal sales tax
I don't say this. You'll have to ask the person who said it.
Your post tax savings will be taxed when spent on taxables - not all things. It may be that post tax savings receive the least benefit from eliminating income tax system, but it's not true that they'll be damaged any more than they are today.
Until I hear a satisfactory explanation of why people think post tax money is going to be damaged beyond today's extent, it's just a bunch of hoooey. Nobody has been able to explain it.
Better check again.
It is only not a problem in your mind because of your unrealistic expectation about the economy booming and prices eventually coming down. If after tax prices do rise 20% as they most likely will, people's savings and fixed incomes will not go as far as they presently do.
The only way for this to happen would be to say that there are currently zero tax costs in prices AND there is no such thing as competition.
After tax money doesn't do as well as other money, but it does't take a hit either.
The fair tax folks believe prices paid including tax, would not go up, but may actually go down. Nobody gets screwed, unless one happens to be a tax attorney, or employed by H&R Block or the IRS.
"The only 'savers' who would not benefit from FairTax are those who are either holding large amounts of after-tax cash, interest-paying bonds, and assets with basis near fair market value (i.e. not appreciated assets)."
Speaking of asset bases, sveral well known money managers have predicted that the DJI would double within 24 months of enactment of the FairTax. Even if that growth rate were only half of that, it would be huge for those holding equities. It would more than compensate those retirees who have to pay a little more for their milk and toilet paper.
Only if you count employee income and payroll taxes already in the costs of the goods. If you let the employee keep these taxes, rather than using them to reduce the businesses costs, then there is certainly a "way after tax money gets hot an extra 20%".
And how it will occur is no secret either. It will happen through the massive sudden inflation caused by giving all the wage earners a large raise, and adding a 30% tax on top of every good and service, with very little (at most 8-10%) business cost savings to reduce pre-tax prices.
"Another likely liability I saw recently was the fact that with all of the illegals working that the prebate could end up as a subsidy for illegal aliens who generally have income well below the poverty line."
Illegals aren't eligible for the prebate.
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