The FairTax, Join in!

[Eomund]

Final-Fan said:

Andir said:

Final-Fan said:
But that doesn't change the fact that the personal income tax is not one of the taxes contributing to the current price of goods. It shouldn't be, anyway, as far as I can see. So the prices would go up in response to the amount of the personal income tax (and other taxes not currently reflected in prices) being factored into prices.

But it is. That 22% is what companies pay to accountants and lawyers to maintain IRS compliance. You take this away and the company has less overhead. It surely won't reduce the price of goods by 22%, but it reduces the cost of doing business. The 23% is simply to replace the current bracketted tax system (that collects 28% or more from the citizens.) In doing so, you reduce both the cost of running a business, and the cost of running the country (by not requiring a full blown team of IRS accountants and support) thus reducing the amount needed to collect in taxes and cut the amount needed to regulate and legislate the handling of money. Over time, the 23% will likely fluctuate (just as sales taxes do / I'm also assuming this isn't fixed, sorry for the ignorance on this) to grant funding for whatever inititives are set forth or to spur the economy just like the current interest rates do.

So, in summary. Replace the 28%+ tax bracketed system with a flat 23% tax that will cover the current expenses just as the bracketed system does. After the current year taxes are collected, next years funding will be at hundreds of billions more agile (lower Treasury funding to cover tax returns), that can be used for things like debt repaying, social security, etc. You reduce the cost of doing business by removing the tax compliance burden, thus enabling competitive pricing even more, or allowing the hiring of more people. The next budget meeting would simply be, do we need to raise this flat tax by .1% to bring in more funding or reduce it by .1% to relax spending?

@Entroper: thanks

The cost of compliance would go down, yes. But what would the cost of tax evasion be? Studies indicate that any sales tax that rises above 10% sees rampant tax evasion, and that's (I believe) the EXCLUSIVE number. Even the VAT in European countries, which is much less tempting to tax evaders and much easier to detect evasion of, has a problem in tax evasion which becomes very serious at about 20%. (Again, I think, exclusive.)

Here's some food for thought:
"Most importantly, the sales tax would generate tremendous opportunities for evasion. For example, in the income tax, the rate of evasion is around 15 percent. But income where taxes are withheld and reported to government by a third party has evasion rates of around 5 percent. For income where taxes are not withheld and there is no cross-reporting, evasion is around 50 percent. Since the sales tax would feature no withholding and no cross-reporting, the possibility of high evasion rates needs to be taken quite seriously."
http://www.brookings.edu/papers/1998/03taxes_gale.aspx

The 23% inclusive (30% exclusive) FairTax plan allows for a tax evasion rate of ZERO.

P.S. I presume you realize that "28% income tax --> 23% FairTax" =/= "5% less taxes"?

 OK Final, I think I have your answer about both Tax Evasion rates and the revenue-neutral status of the FairTax.

First lets start with the Tax Evasion question. This is a lenghty report called "The FairTax reduces complexity, compliance costs, and noncompliance" http://www.fairtax.org/site/DocServer/TheFairTaxReducesComplexityComplianceCostsAndNoncomplian.pdf

Yes, this document is from FairTax.org but it is accurate in its portrayal of current noncompliance with the current income tax structure. You can take or leave its proposal of FairTax compliance, but it does raise one very interesting point: the number of tax filers under the FairTax would reduce by 80%. Thus you would only need a small portion of "watch-dog" agents to verify tax compliance.

Another note from that document is the total tax compliance costs of the current tax code. I know I have said this before, but it bears saying again. America, as a whole,  spends 6 billion hours and $265 billion in the costs to just comply with the current tax system. That is the equivalent of a 22.2% surcharge on the amount of income taxes collected! For another comparison the $265 billion is costs to comply is roughly the same amount as America has given in charitible donations... that is messed up. (for source see previous posts)  Another document discussing only the compliance costs of current vs. FairTax is this: http://www.fairtax.org/PDF/WhatTheFederalTaxSystemIsCostingYou.pdf

Again even if you take their assertions with a grain of salt, you have to recognize that our current system is broken. Also note that the cost of collecting a retail sales tax currently costs businesses between 2%-3.8% of either the taxes collected, or the business' revenue (it wasn't very clear on that point). The point still holds that collecting sales tax is much less overhead than the current tax system.

------------------------------------------------------------------------------------ 

Now for the next topic, the revenue neutral claim of the FairTax. This document is posted on the FairTax.org website but is not calculated by them. The economists that have calculated this are very well respected and would have no reason to distort the truth (as some people might/could come to think). http://www.fairtax.org/PDF/Tax%20Notes%20article%20on%20FT%20rate.pdf

This document goes through the FairTax proposal and looks at the revenue of both the current tax code and the FairTax. It is extremely long and has lots of mathematical explanation of the FairTax and current tax code. It is not impossible to read through and understand (I am a testiment to that), you have to know basic algebra and have a strong mathematical fortitude to wade through all the different equations. In the end they calculate that the rate of the FairTax would need to be 23.82% to meet the estimates of FY 2007 current tax revenue. However that is assuming that the FairTax will not be a boon to the economy as they believe it could be. In which case if the FairTax increased the taxbase by about 3% the 23% would still be perfectly revenue neutral.