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.
This is wonderful! He backstops his ignorance with even more misinformed misunderstanding of hidden taxes.
I see that Nightie is illustrating his lack of understanding of what the cascading example shows. that's pretty typical.I understand completely what the "cascading" example shows. It shows you have absolutely no idea what the hell you are talking about.
Mysteries? Oooh, sounds spooky.Didn't mean to scare ya. I'll be more careful in the future.
Doesn't matter much, since our economy isn't built on a feudal caste system. Individual taxpayers represent all three groups - labor, capital, and consumption. All of the embedded tax and compliance costs in every supply chain must show up somewhere, either in higher prices, lower wages, or both. Any way you look at it, individuals are the ones who take it in the shorts when the gov't "taxes" corporations.You forgot lower return to investors.
LOL, yeah, showing your numbers to be completely impossible is a 'straw man' claim.....whatever.
What's your point?That you forgot that the corporate tax could be borne by investor through a lower return.
Hmmm, just for the sake of argument, I'll say you are wrong. Investors don't bear corporate taxation through a lower return.I didn't say they did. I said they could.
All corporate tax and compliance costs show up in product prices.Maybe you could tell me how much corporate tax and compliance costs show up in the price of GM's cars. They lost $8.6 billion last year. Why didn't they just raise their price to cover all their costs, including compliance costs and all the tax costs of all of their suppliers? Why didn't they "pass all of it on to the consumer"? Did they just forget?
huh?????
Uh, yeah, that's what I said.
Being the accomodating fellow that I am I'll tell you! ALL of those types of costs incured by GM (don't tell me they do not incur such costs simply because the failed to make a profit that year) plus those of every supplier of every component in the supply chain of GM but that's all!
And, if additional levels are involved instead of the 6 chosen to present the illustrative example, you'll find that the cascading and embedding picks right back up again. So while the "Accumulated tax as % of price" (which in my example is "tax cost as % of sell price") appears to fluctuate in your example, it only does so because of the carefully-chosen marginal points used. But your example has other basic flaws as well. Your derivation of "cost of value added" appears both arbitrary and inconsistent from level to level - it makes no sense. The poorer performing businesses are adding less value proportionately than the more successful ones; perhaps that's why they're clearly going out of business - all 4 of them.
More than that, even though you have basically chosen 4 of the 6 levels as being failing companies, there will be few companies even at what you call a 4.9% "net profit margin". You spreadsheet example has changed the entire example and only illustrates that failing businesses (4 of the 6) pay little or no tax. They also will not be in business long at that rate. A 4.9% "net profit" (your spreadsheet description) really represents a markup (as used in my spreadsheet) of about a little under 9% which will be untenable in the real world.
Another fly in your ointment is that you assumed that even those businesses doing poorly were paying taxes when in fact they would not be since they have little or no profit and you haven't adjusted the rate.
It would have been more intellectually honest of you to use the second example I gave which used a net profit of 10% *which represented a markup of about 18%) and go from there. Artificially adding costs isn't what the example is all about and you apparently ignored the fact that I clearly stated the example was not intended to be any sort of real-world accounting example of businesses but was intended to show how the cascading mechanism of embedded tax costs occurs - which it does.
Your example is so drastically modified in several ways that it does nothing of the sort. Since you are pretending to have some sort of "real world" example (and you don't) you could at least have used more realistic markup/net profit levels instead of picking 4 of the 6 as failing businesses. Lets say that all 6 were reasonable businesses operating at some sort of profit level such as the 2nd example I showed.
As it is your example means nothing at all except as an example of your cleverness in devising a spreadsheet to minimize certain values (and some of those are incorrect as we've seen). If I were grading your effort in class, Nightie, I'd give you an F- and send you back to Business 0.000001.
This exercise you'd like to engage in is truly nonsense and I'm certainly not going to continue the waste of time with you. I've been all over this ground in the past.
Perhaps the funniest thing of all, though, with your misbegotten and misshapen attempt at illustrating some point (which escapes me since the execution is so flawed) it this:
EVEN WITH ALL OF YOUR CAREFULLY-CHOSEN VALUES (OFTEN PULLED FROM GOD-KNOWS-WHERE) AND UNREALISTIC ASSUMPTIONS OF 4 OF THE SIX BUSINESSES BASICALLY FAILING AND THEREBY CONTRIBUTING LITTLE OR NOTHING THE THE CASCADING EMBEDDED TAXES AT THE END OF LEVEL 6 YOU STILLSHOW EMBEDDED TAXES COSTS OF ALMOST 5%. THIS WOULD BE IN ADDITION TO THE 7.65% YOU "EXPERTS" HAVE BEEN HARPING ON THAT STEMMED FROM THE SAVING OF THE "ER" PORTION OF PAYROLL.
So, if you are to be believed you're illustrating close to a 12.5% price drop by eliminating the income tax and that doesn't even count compliance costs which one of your whizzes (AR maybe?) said was 2%. Goodness how prices will drop with the income tax elimination ... and you've just demonstrated it.
My example illustrates the cascading mechanism with far less folderol to get in the way than yours, but thanks for proving that perhaps the 15% price drop area is reasonable. Who'da thunk it??? 'Preciate it Nightie!! Don't know how you'll square that with the other Squirrels, though, since you've just shot them all in the foot.
Those costs were in the price of their cars and they still lost $8.6 billion last year?Maybe you could tell me how much corporate tax and compliance costs show up in the price of GM's cars.Being the accomodating fellow that I am I'll tell you! ALL of those types of costs incured by GM (don't tell me they do not incur such costs simply because the failed to make a profit that year) plus those of every supplier of every component in the supply chain of GM but that's all!
Yep!
You may also be unaware of the fact that GM, as required by contract, has been paying the salaries of many thousands of their UAW employees who have not shown up for work in years!
Yep!So the cost of their sales was $8.6 billion more than their sales, but somehow those costs were in the prices. If those costs were in the prices wouldn't the sales be higher than the costs? Hmmm....
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