Not that it makes a big difference in terms of whether prices will drop, but your assumption on the nanny is premature. I see less incentive to be illegal.
It would depend on the relative rewards vs. penalty. A nanny today generally works under the fiction that they are an independent contractor. As such, to be legal they would have to report their income and pay self-employment taxes of 15.3%, plus income taxes, plus FUTA, etc. They get the benefit of getting credits within the SS system. That is a poor reward compared to the taxes owed.
Under the FairTax, they must be registered with SS and report their wages to get credits in the SS system -- but they do not have as high a penalty in taxes owed.
Supposing a nanny is working for $2000/mo, she would owe $306 self-employment tax and $200 income tax. She takes home $1494. Or she keeps off the books and takes home $2000. It cost the household she works for $3000 income to pay her $2000. Legal, govt gets $1506 taxes. Illegal, govt gets $1000 taxes -- but also has no future SS obligation to her. It costs her $506 buying power to be legal.
Under the FairTax, she charges $2400/mo gross, of which $552 is FairTax and she takes home $1848 and gets the prebate of $190 for a total $2038. Or she keeps off the books and takes home all $2400 with no prebate. Either way, it only cost the household $2400 income. So the household is $600 ahead. Legal, govt gets $1159. Illegal, govt gets $690. Her buying power is 77% of what she spends, so legal is $1569 and illegal $1848.
Under the FairTax it costs her $279 to gain the benefit of credits in the SS system and the psychological benefit of being completely legal. Under the current system, it would have cost her $506 for those benefits. The household is ahead $600 under the FairTax compared to the current system. Even if she insisted on charging more so her net buying power was the same as illegal, the household is still ahead $321.
That seems like it would offer less incentive to be illegal than under the current system. Am I missing something ?
"Am I missing something ?"
Not that I can see ... and that looks like a very good analysis of the particular situation.
Thanks for the input.
Yes, if a nanny is earning $24K per year, the odds are she is paying very little federal income tax. Her personal exemption and standard deduction add up to about $8000, the her next $7200 is tax free. The remaining $9000 or so is taxed at 15%, or about $1300. You overstated her income tax liability by about $900, and that is at the higher single rate.
I don't think I ever used the terms "nanny" and "incentive to be illegal" in the same post or even in the same context.
My belief is that, human nature being what it is, the less scrupulous amoung us value the risks and rewards differently than you or I do (they less fear the consequences of being caught than they value the opportunity to make an additional buck.) The increased incentive to be "off the books" derives from the ability to make an under the table retail transaction at a substantial discount to the customer with both the customer and the provider getting a better deal than executing the same transaction "on the books." That's why folks do it today despite the presence of the all knowing, all seeing, oracle of TaxLand: the IRS.
Today, the nanny is already off the books. That's why Zoe Baird withdrew her name from nomination for Attorney General some years ago. You see, she didn't pay the "nanny tax" for her domestic help ... and SHE was in line to be Attorney General!
Do you really think the illegal Mexican Gardener, working for cash, is going to set himself up with SS system and report their wages? Of course not.
How about the House Painter that says: "I'll tell you what, I'll paint the garage AND the house if you just pay me an additional $550 cash. Otherwise, I have to charge you $650 (because of the Tax) He's otherwise "on the books", but winds up with 10% more in his pocket and a paper trail for a job to keep the auditors at bay. The homeowner saves $100. (Normal, above board price for Garage and House: $650 = $500 cost plus $150 FairTax).
I believe the important aspect of such deals is simple: people will not analyze the risk/reward in any situation based on whether the old tax system would have left them ahead or behind (as you suggest in your example.) People will maximize their immediate opportunity. It there a dose of illegality in it, they'll decide whether they are likely to get caught.
The reason I believe there is more opportunity AND incentive to cheat under the Fair Tax is that people are faced with more consumption options than income options. That, on its face, suggests that there is more opportunity to execute an illegal, tax free transaction under the FairTax.
As for incentive, a retailer could offer up to a 23% discount on an "off the books" transaction to entice a sale, and not loose a dime in income. Like the House Painter, it's quite likely he'll never be caught, especially when the tax-free transaction is buried in a larger above-board transaction.
It cost the household she works for $3000 income to pay her $2000.One of us is. Where and why did the $3000 income to pay her $2000 come into play.---
Am I missing something ?
Here is what you're missing.Supposing a nanny is working for $2000/mo, she would owe $306 self-employment tax and $200 income tax. She takes home $1494.
Her after tax (spendable) income is 75% of her gross...
Under the FairTax, she charges $2400/mo gross, of which $552 is FairTax and she takes home $1848 and gets the prebate of $190 for a total $2038.Using your numbers. Her after tax (spendable) income is only 65% of her gross (13% less than under the income tax) INCLUDING THE phoney REBATE and her gross (not including the rebate) under the fairtax is 20% MORE than under the income tax...----
Her buying power is 77% of what she spends, so legal is $1569
So, once again, using your numbers, she has a higher gross but smaller percentage of disposable income INCLUDING THE phoney REBATE under the Fairtax...
That's a double whammy!
For some reason you gave the nanny a 20% raise and it still isn't a favorable outcome...
Something doesn't add up here. You're making the assumption that the entire $600 save by the employer was spent on consumable goods when it just as likely might have been split between savings for lil' baby's college fund and the under-the-table mow and blow guy (the nanny's brother). You're also assuming the nanny spends her entire $2400 on legal consumables. The nanny also has a side job that pays her benefits and qualifies her for SSI (she doesn't know enough to realize that she could get more "credits" by reporting her tax-free nanny income. She just knows that her employer isn't going to report her, so, she isn't going to pay any tax on the nanny wages.
Scenario 1 (prices rise by the amount of the FairTax)
Obviously not a better deal for the nanny and an even worse deal for the TaxMan, but the parents got a college fund and a the grass cut, thanks to the FairTaxCurrent System, Gov't gets $1000 in taxes
FairTax System, Gov't likely gets less than $552
Current System, Nanny gets $2000 net pay
FairTax System, Nanny gets $2400 net pay
Current System, Buying power = $2000
FairTax System, Buying power = $1848
Scenario 2 (prices fall by the predicted amount, then tax is added back in)
The nanny's awash, the parents are awash (they don't get that extra $1000 that used to be taxes), the TaxMan groans even more than before.Current System, Gov't gets $1000 in taxes
FairTax System, Gov't likely gets less than $460
Current System, Nanny gets $2000 net pay
FairTax System, Nanny gets $2000 net pay
Current System, Buying power = $2000
FairTax System, Buying power = $2000