The Fair Tax: Stop the Tax Cheats

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.

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.

Your "realistic illustration" is anything but Nightie. You've obviously chosen a set of conditions (including the spreadsheet layout itself) that intentionally overstates costs so that profits will be reduced, thereby reducing taxes paid.

LOL! I used the =RANDBETWEEN(-10,30) function in Excel and divided it by 100 to give me a gross profit margin between -10% and 30%. That means the average profit margin on a number of runs would be 10%. I did manually adjust one, the negative one closest to 0, and set it at 0% so there would be one company breaking even (companies do break even in the real world). The average net profit margin for Fortune 100 companies was 6.3% in 2005. In your example, you set the net profit margin for every company at 33%! I think it's obvious my example is more realistic.

And yes, certainly if there are no profits or there is a loss there will be no taxes paid BY THAT BUSINESS. The costs that have cascaded and embedded to that point, however, will still remain in the items involved as they move to other levels.

But somehow they weren't able to pass all their costs along in their prices. I guess they should have gone to the Pigdog School of Economics and Truck Driving.

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.

Additional levels won't matter. For example, if the average profit margin is 10% and the tax rate is 33%, taxes will 3.3% of sales regardless of the number of levels.

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.

Those "carefully chosen marginal points" were randomly generated!

Your derivation of "cost of value added" appears both arbitrary and inconsistent from level to level - it makes no sense.

That was a random percentage, too. I multiplied the input by that percentage (10%-110%) to get the "Cost of Value Added." Some levels add a lot of value, some add very little - just like the real world.

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.

Huh? The profit margins were completely random except for the one breaking even. The one that broke even added almost as much value as the one that made the most profit! What the hell are you talking about? And only one is losing money (lots of companies in the real world lose money; e.g. GM) - and they may turn a profit the next year. Who knows?

More than that, even though you have basically chosen 4 of the 6 levels as being failing companies,

Failing companies!?! Only one is losing money, you idiot! Do you think a company that has a net profit margin of 4.9% is failing? You may want to tell Wal-Mart. Their net profit margin last year was 3.7%.

What is becoming very clear is that you have an extremely unrealistic view of the business world.

there will be few companies even at what you call a 4.9% "net profit margin".

LOL! You are really flaunting your ignorance now. Dell's net profit margin was 6%. Net profit margins in the 4.9% range are extremely common. Do you really think every company makes ~33% profit margins? Only a few companies, like Microsoft, can do that on a regular basis. Hell, ExxonMobil had more profits than any company ever last year and their net profit margin was only 10.8%!

You spreadsheet example has changed the entire example and only illustrates that failing businesses (4 of the 6) pay little or no tax.

Most business pay very little tax when compared to revenues. Pick a company and go look at their annual report. (I'm sure you'll pick an atypical company.)

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.

That's gross margin. You "marked up" the cost of inputs. Your businesses had no costs of production or operating expenses whatsoever. I'm not sure who you think is doing the markup at those companies because they don't have any labor costs. The average gross margin for the Fortune 100 companies was ~10%. Most companies would be very pleased with a gross margin of 9%. I don't know why you think a company with that type of profit is "going out of business." Why would they? They are making money.

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.

LOL!! I think it's very clear who has a better understanding of business in the real world. You may want to spend some time going over some income statements of real companies. You seem to be totally clueless of how things work in the real world.

You apparently think that profit margins are set by spreadsheet manipulation so that people don't have to make decisions. However as I said originally the example I presented was to illustrate the mechanism of cascading and embedding taxes which it does more clearly that your pathetic attempt to give a "realistic illustration" using unrealiatic means (spreadsheet functions).

All you're saying is you picked numbers out of the air until they satisfied the objective you had in mind, And the taxes embedded in a thing at a given level are not removed as the thing continues on to other levels; they are still embedded (which is part of the reason the choices you made break even or lose money).

Also, if you think that 6.3% is an average profit margin why did you set the average profit margin in your example to less than 1/2 that value if not to boost your agenda (realistic, right?). Your example also makes no adjusment for those levels paying little or no taxes but uses the same rate for all (realistic, right???). And adding other levels (with most showing generally profitable operation instead of using continually marginal businesses) will show the cascading and embedding picks right back up.

You seem to think that using random generation does not mean that one cannot generate many sets of numbers and taake the one that best suits the agenda he has. It certainly can as you've shown. Spreadsheets are just like the old saying "figures don't lie but liars figure". Since there can be an infinite number of spreadsheet examples I certainly don't intend to debate each and every one with you. I've said that yours is no more "realistic" than any other and does not show the mechanism that I was illustrating nearly as clearly as does my example.

The costs in my examples are there and adjusted for by the arrangement rather than broken out as separate items to allow profit reductions as you do. Your Cost of Value random generation is what accounts for the break-even level and the level "making the most profit" being similar and nothing else.

As for your pretense that you have "a better understanding of business in the real world", that's truly funny since as I have always said the cascading embedded tax examples are NOT intended to be illustrative of any company or set of companies but to illustrate the mechanism of cascading embedded taxes which my examples show and which yours intentionally obscures - and is no more realistic either.

So the net of it is that your example is not realistic at all, is selected to show a specific agenda you have - which of course it does having been constructed for that purpose - and it STILL shows, as I said, that you have proved that the 15% price decrease by stopping the income tax is quite within reason.

Thanks, Nightie, I always knew you had it in you. Demonstrating something by your riduiculous spreadsheet contrivance that you have been denying all along - that there's lots of room for price decreases when the income tax goes bye-bye even without touching employee wages.

Or is your "example" haywire, operhaps???

Silly Corporation! Running costs up to the point that they are no longer competitive!

More like silly Competitors who can profitably make a product forcing prices down for optimum market share.

Precisely the mechanism that assures that any business cost savings are applied to optimizing volume through pricing for profitibility, over those who will not or cannot follow suit and ultimately go the way of the dinosaur if the do not change their business models.

Competition is the reason that a marginally run business fails. A profitable company driving to lowest price for optimal marketshare & profit drives the losers out of the market.

Competiton is why prices will always move to the bottom dollar in price that sustains profit for the successful and drive the inefficient, whence unsuccessful, out.

The successful will grow and expand in both sales and production base as the uncompetitive drop out for lack of adabtibility.

Or is your "example" haywire, operhaps???

The error in the example lay in the elements he claims have nil profits. As an average, that is a temporary condition as efficiently run business (driving prices down) take over the lion's share of production.

The low profits must be recognized for what they are, a transitional condition. Prices in those markets are low precisely because some businesses see themselves able to make substantive profits in lower pricing extending market share and production through efficient operations.

The companies that are not profitable in such conditions are headed the direction of the do-do bird as they leave avg net profit for the sector rises.

Production resources and sales will go to the efficiently run businesses offering product at lowest price possible ultimately driving the inefficiently run businesses, who do or can not change business models to compete, out of the market and out of the averages.

The low profits must be recognized for what they are, a transitional condition ...

Not necessarily. Two examples of common situations which would be reflective of "low profit" as a permanent business condition are:

-- any proprietorship, partnership, or closely held corporation that pays its owners all proceeds from the business as salary. No profit would show on the income statement, no profit tax would be due. (Stage 4 in Your Nightmare's example.)
-- any "pass through" element of the chain, like transportation, where the primary goods are not counted as part of that stage's input costs. Truckers don't actually buy the goods they transport; their costs and profits are relative to the value of their service rather than the value of the products they process. (Stage 3 in Your Nightmare's example.)

The only necessarily "transitional" stage is shown in Stage 6. Even there, the transition may be multi-year (as in a Venture Funded startup situation where economies of volume/scale have not yet been reached, and are not expected to be reached for a while.)

In short, Your Nightmare's example is quite reflective of a real business situation (unlike pigdog's fantasy.)

Competition is the reason that a marginally run business fails. A profitable company driving to lowest price for optimal marketshare & profit drives the losers out of the market.

BS. Market share doesn't make a company profitable. Although GM has lost market share, they are still number one and they lost plenty of money.

GM's problem isn't that their cars are more expensive than other cars, it's that people don't think they are worth what it costs GM to make them. So GM sells them at a loss.

GM's market share is large enough to have market power and now they are going to cut back on their production reducing supply in the market to match the demand. This would shift the supply curve to the left and hopefully raise the price. It may work, it may not. But if it works their market share would be reduced and they would be selling fewer cars at a higher price, not more cars at a lower price.

Note that this isn't changing what it costs them to make a car, just how many cars they produce. Also note that if they reduce their supply, other manufacturer's cars will be in greater demand and the market price for their cars would go up. Their costs wouldn't have gone up - the market dynamics would have changed.

If GM stopped producing cars tomorrow, don't you think other manufacturers could sell their cars for more money? Would their costs have gone up? It's simply supply and demand.

The error in the example lay in the elements he claims have nil profits. As an average, that is a temporary condition as efficiently run business (driving prices down) take over the lion's share of production.

Out of the Fortune 1000, 106 lost money and 3 broke even. Their weighted average net profit was 6.04%.

The low profits must be recognized for what they are, a transitional condition.

Lots of businesses don't last, too. Do you think they do no business at all before they fail?

The low profits must be recognized for what they are, a transitional condition. Prices in those markets are low precisely because some businesses see themselves able to make substantive profits in lower pricing extending market share and production through efficient operations.

Or maybe too many companies entered the market and the supply is too high. They could all be losing money until a few business leave the market, reducing supply and raising the market price.

You seem to think business is a race to the lowest price. Do you buy the lowest priced option of everything you buy? Are you living in the cheapest house available? Do you drive the cheapest car on the market? Is your computer the cheapest one you could find?

The companies that are not profitable in such conditions are headed the direction of the do-do bird as they leave avg net profit for the sector rises.

Businesses fail and new ones start up every day. Profits and success are far from guaranteed in the real world. Even ultimately successful businesses will be unprofitable their first few years.

Production resources and sales will go to the efficiently run businesses offering product at lowest price possible ultimately driving the inefficiently run businesses, who do or can not change business models to compete, out of the market and out of the averages.

Sales will go to the business offering the best values to their customers. People pay what they perceive something to be worth. The greatest value is not necessarily the cheapest product. This is why businesses spend fortunes on marketing. They are trying to change the perceived value of their products so they can increase the demand for them. A higher demand with the same supply usually means they can garner a higher price.

BS. Market share doesn't make a company profitable. Although GM has lost market share, they are still number one and they lost plenty of money.

They lost profitability because they could not offer their product, at a profit where other manufactures could and sustain market share.

When your competitors are able to under price you and still maintain profitablity, you are on your way out of business so long you are not able to adjust your buisiness model (i.e. take advantage of lower costs) to compete with them.

GM's market share is large enough to have market power and now they are going to cut back on their production reducing supply in the market to match the demand.

All the while their competitors increase production as a function of their higher productivity, sending GM into its ever downward spiral as long as it is unable to increase efficiency due to its higher production costs. Cutting back on production is a concequence of losing market, and a clear path to ultimate expiration should it be maintained.

Note that this isn't changing what it costs them to make a car, just how many cars they produce.

Seeing as they are in loss territory, not changing what it costs the to make their car is just a formula for going out of business more rapidly. If it costs you more to make cars than you can sell them for, reducing the number of cars you sell in the market isn't going to do a thing for you bottomline. I just makes sure you go out all the faster for not being able to meet the competition's price and growing profitable market.

If GM stopped producing cars tomorrow, don't you think other manufacturers could sell their cars for more money?

More than one manufacture is in the game, they compete with each other as well as GM. GM going out of competition does not change the dynamics one bit. Profitably producing at lower cost and higher markets shares just keeps price low to the customer for all the products remaining in the markets taking over market where GM folded.

Lots of businesses don't last, too. Do you think they do no business at all before they fail?

Sure they do, either at reduced market continuing losses where no cost reductions can make them more competitive with other in their business sector that can offer the same product at lower price profitably.

To continue at a loss indefinitely by not being able to realize cost reductions and efficiency of your competitor is a guarantee of demise.

You seem to think business is a race to the lowest price.

Busines is a race to lowest price at a profit. If you particular business is less efficent than your competitor's to the point you cannot realize a gain, guess what you ultimately go out of business.

Businesses fail and new ones start up every day.

And the market price is set by those that are able to compete at the lowest price with a profit. Not those who continue an inefficient production and loss to the competitors.

Sales will go to the business offering the best values to their customers.

Precisely, and those who can do so with a profit set the bottomline price for given quality, while those who cannot do so with gain ultimately expire.

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