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.
The FairTax folks can only make such a statement if they are assuming that the gross wages of workers will be reduced to the present level of takehome (after tax) pay.
This myth of the "keep 100% of your paycheck, prices will remain the same on average" has been debunked by the FairTax's own economist, Dr. Jorgenson. Neal Boortz has also "clarified" his thinking to agree that this is wrong.
There already is competition, so that is a BS arguement. The idea that eliminating $550 Billion worth of taxes that will actually be saved by businesses will enable them to lower their prices by more than $2 Tillion is just one of those fairytales that you profess you don't believe in. If you want to claim competition will drive most of that $550 Billion into price reductions, that's fine. Extremely optimistic, but OK. Even allowing for a generous amount of savings from compliance of $100-150 Billion and assuming all that gets passed on to the customer, gets you to an extremely optimistic number of $700 Billion for price reductions. On your tax base of consumer goods and services of $10 Trillion, that only gives you the possibility of seeing a 7% reduction in prices. Now add on the 29.87% sales tax, and those goods that cost $10 Trillion today, will cost over $12 Trillion after the fair tax. There is no getting around it.
My $1 millioin next egg will not go nearly as far under the fair tax. Prices on new goods and all services will be up an average of 20% and my wealth will be the same. People on fixed incomes also have this same issue. The prebate helps some, but it also has the effect of pusing the required tax rate up another 5%.
For now. Wait until the courts get hold of it or the Democrats and RINOs change it. Illegal Aliens are not suppose to get social security benefits either, but there are loopholes that give them credit for work they do here illegally. Illegals get all kinds of benefits from schooling to medical treatment. To say illegals won't get the prebate is very optimistic to say the least.
"THink about it, if everyone gets it, and everyone pretty mich spends to the poverty line anyway, what is the purpose of collecting more except to make it regressive and tax the extra 3% on the people who spend above poverty level so that those below pay nothing to fund the government?"
You have your terminology mixed up. The purpose of the prebate is to make the FairTax PROgressive when measured against consumption. The research which went into the development of the FairTax made it clear that a substantial majority of the American people opposed any tax system which made it difficult or impossible for those at the lower end of the economic ladder to afford basic necessities. The prebate mecahnism is the simplest and fairest way to accomplish that within the contect of a sales tax. It is FAR more equitable and easy to administer than the mechanism that most state sales taxes use, which is to exempt certain items.
I doubt many freepers will see that as a positive.
It is FAR more equitable and easy to administer than the mechanism that most state sales taxes use, which is to exempt certain items.
How is not taxing food harder to administer than sending a monthly check to every household in the country??? It is so easy to account for every man, woman and child in this country on a monthly basis as opposed to grocery stores simply programing their registers not to tax food.
Well, as the perfect is said to be the enemy of the good I do not doubt the fair tax is not without its faults. Still, I support the fair tax as an incredible improvement over our current system.
To be able to determine to a large extent how much one is taxed is terrific. I also believe that business/job formation will explode. The upside to the fair tax far and away dwarfs the downside.
"The purpose of the prebate is to make the FairTax PROgressive
I doubt many freepers will see that as a positive."
Positive or not, that is what is needed to get a tax reform proposal seriously considered. You and RFG may want a regressive system, but you are in the distinct minority.
"How is not taxing food harder to administer than sending a monthly check to every household in the country??? It is so easy to account for every man, woman and child in this country on a monthly basis as opposed to grocery stores simply programing their registers not to tax food."
Oh, I see. So you would prefer to see "food" carved out as the only necessity? Not clothes or housing or transportation? Do you really think that you could get by with defining "food" as the only necessity?
Ok, fine. How would you define "food"? Would expensive steaks and wine from the grocery store be considered "food"? You mentioned grocery stores, but made no mention of restaurants. So I assume you could buy "food" at a grocery store tax-free, but would have to pay the tax if you ate out?
If I were designing a sales tax, I would exclude both housing and groceries only. The prebate is crazy.
Ok, fine. How would you define "food"? Would expensive steaks and wine from the grocery store be considered "food"? You mentioned grocery stores, but made no mention of restaurants. So I assume you could buy "food" at a grocery store tax-free, but would have to pay the tax if you ate out?
Indiana like many states already do this and I don't see the expensive compliance problem you claim. It seems far more efficient than sending out a monthly check to everyone. Steak bought in the grocery store is tax free, prepared food like those by restaurants is taxed. Wine and tobacco are taxed.
You'd say that's pretty good? At five bucks an hour labor rate, that's $1.5 BILLION dollars flushed down the crapper. Just chump change though, right?You want to see some chump change? Try calculating the interest costs when people have to finance their FairTax on large purchases (or even credit card purchases).
For now. Wait until the courts get hold of it or the Democrats and RINOs change it. Illegal Aliens are not suppose to get social security benefits either, but there are loopholes that give them credit for work they do here illegally. Illegals get all kinds of benefits from schooling to medical treatment. To say illegals won't get the prebate is very optimistic to say the least.What about "guest workers"? Would they be eligible?
Would American citizens residing in foreign countries get a check?
I have never bought into this theory that the fairtax will cause the economy to grow at an overheated rate of 10%, put more money in people's pockets, and inflate prices, and yet there is going to be 'downward pressure' on interest rates. That just ain't possible.
Loophole: To liberals, any provision of the tax code that fails to claim money earned, inherited, saved, or otherwise pocketed by known taxpayers.
-- The Conservative's Dictionary
I agree with you. The Fair Tax is the way to go, but getting politicians, of EITHER party, to do away with a tool that allows intimidation of opposition will be difficult at best..
You forgot, of course, to add back the tax savings from paying back the mortgage principal with pre-tax dollars.That doesn't change the calculation of the interest on the FairTax. (And home buyers currently benefit from mortgage deductions.)
You also neglected to take into account the downward pressure FairTax will exert on interest rates (as lenders are concerned with after-tax rate of return, and their tax costs are merely reflected in a higher rate you pay).I used 4.5% as an rate. Freddie Mac show this week's average rate for a 30 year mortgage at 6.28%. I think I was more than generous regarding any possible mortgage rate reduction.
Except that money supply and the cost of money is not govern by the free market, but the federal reserve. The federal reserve would have to loosen the money supply and decrease rates in a time where economic activity is very robust. Something the Fed never does.
The concept of "Fair Tax" is assinine....unless there is a concept instituted for "Fair Spending" first.
If the legislatures were constrained by some kind of "Fair Spending" restraint, then any method of taxation would be fair.
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