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.)
Dear Dimples,
"In a more general sense, both tax schemes only collect tax at a single virtual toll booth:"
That's a really clear way to say it. I may borrow that. ;-)
"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 agree. Turning the tax collection methodology upside down doesn't change human nature.
"I believe the best working assumption to make now is that the magnitude of lost tax potential in each scheme is about the same."
That's my best guess, although I'm willing to go so far as to say that it's possible that an NRST might be a little more difficult to evade than an income tax, and thus, may net a little more from the "underground economy."
However, my understanding is that the 23% inclusive rate is based on the assumption that most of the "underground economy" transactions will be captured. Thus, if it turns out that you're right or I'm right, the rate will have to be higher. Which will encourage more evasion and avoidance.
As well, just how large a consumption tax can you have before you start to really affect consumption?
"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.)"
Yeah. That's actually one of my objections to the NRST. It's a huge change. A really, really huge change. To me, it seems like taking an ocean liner and turning it upside down. The basic structure of the boat will stay about the same, but you're gonna have a lot of ruined china (among other things).
The problem is that the entire society IS the experiment.
sitetest
The example given by s-test which has illegal aliens paid by someone with after tax income is well off-point since that money has been taxed by an income tax from the legal economy regardless of whether the after tax money is spent for day labororers, jellybeans, or stuffed in a mattress. It does not derive a cent of tax contribution directly from the illegal economy.
Such an example also pre-supposes that the person with the legal income actually PAYS income tax (not everyone does) so it would be necessary to offer some convincing data about the taxes paid (by those hiring day laborers) since many pay at a rate of, say 15%, which is still less that the tax contribution derived by the FairTax,
The FairTax in a similar situation is quite different (assuming in both examples the illegal income is not taxed) in that the illegal income will be taxed and at a rate of 23% when spent for taxable items.
I also find no justification for your uncorroborated assumption that "... the magnitude of lost tax potential in each scheme is about the same ..." since it clearly is not as the legal income is taxed regardless of what it is spent for (or even if it is spent) while converting it to illegal income by hiring illegals yields no further tax revenues at all at present but clearly does with the FairTax - at a 23% rate. The illegal economy will clearly yield greatly more tax revenue under the FairTax for that reason.
With the case of drug dealings this is even more clear since a great amount of the money spent for drugs presently is stolen money - completely untaxed with no income tax paid at all (and the same comments as with the above example apply to any legal income involved). The FairTax will also yield considerable larger tax contributions fom this part of the illegal economy when spent for consumption.
No "experiment" is necessary to divine the benefit of the FairTax on this matter - it is quite obviously highly favorable to the FairTax.
The example given by s-test which has illegal aliens paid by someone with after tax income is well off-point since that money has been taxed by an income tax from the legal economy regardless of whether the after tax money is spent for day labororers, jellybeans, or stuffed in a mattress. It does not derive a cent of tax contribution directly from the illegal economy.
Such an example also pre-supposes that the person with the legal income actually PAYS income tax (not everyone does) so it would be necessary to offer some convincing data about the taxes paid (by those hiring day laborers) since many pay at a rate of, say 15%, which is still less that the tax contribution derived by the FairTax,
The FairTax in a similar situation is quite different (assuming in both examples the illegal income is not taxed) in that the illegal income will be taxed and at a rate of 23% when spent for taxable items.
I also find no justification for your uncorroborated assumption that "... the magnitude of lost tax potential in each scheme is about the same ..." since it clearly is not as the legal income is taxed regardless of what it is spent for (or even if it is spent) while converting it to illegal income by hiring illegals yields no further tax revenues at all at present but clearly does with the FairTax - at a 23% rate. The illegal economy will clearly yield greatly more tax revenue under the FairTax for that reason.
With the case of drug dealings this is even more clear since a great amount of the money spent for drugs presently is stolen money - completely untaxed with no income tax paid at all (and the same comments as with the above example apply to any legal income involved). The FairTax will also yield considerable larger tax contributions fom this part of the illegal economy when spent for consumption.
No "experiment" is necessary to divine the benefit of the FairTax on this matter - it is quite obviously highly favorable to the FairTax.