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[Final-Fan]

Eomund said:

Final-Fan said:

Eomund said:

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.

[edit: Final-Fan excised stuff covering other topics for purposes of brevity.]

I'm afraid that the PDF does nothing at all to allay my fears of a high tax evasion rate under any large sales tax collected solely at the point of sale. This is not because I am skeptical of their explanation but because they have none.

That document's only fact-based reason for assuming a low evasion rate is based on a 2000 study of Minnesota's sales tax (6% price-exclusive) that had a 10% evasion rate. This is (A) more than ZERO which the last FairTax plan with which I am familiar was assuming, and (B) hopelessly naive to think that evasion of a 30% tax (exclusive) would not be any higher than that of a 6% tax. Also, the FairTax would be applicable to many, many more items than current sales taxes -- more opportunities to cheat -- but not to ANY business-use items -- more opportunities to cheat.

"One study found that, in Florida, where sales taxes have never exceeded 6 percent, 5 percent of all purchases made with business exemption certificates were used inappropriately to exempt personal consumption from taxes."
http://www.brookings.edu/papers/1998/03taxes_gale.aspx

How many people would you expect to cheat on a 6% tax? How many more at 30%?

What evidence is there that a retail sales tax of 30% price-exclusive would not have drastically higher evasion rates than the relatively evasion-resistant VAT taxes that are already having problems in Europe at (more or less) 20%?

An even better question: Many of those European countries switched from retail sales tax to VAT in the late 1960s. I've heard that this was to cut down on tax evasion. Again, these rates are all much lower than that proposed by the FairTax. I haven't yet found confirmation on that reason for switching, but they must have had some reason. Why would the United States not have that same reason? Why would the United States not have an even worse problem with tax evasion?

You raise a valid point. One that I do not have a concrete answer for. But let me ask you this, under current law tax evasion is about 15%, I believe. What constitutes tax evasion under current law? There are several ways to do it, namely misrepresenting your income on your 1040. There are also many other ways to cheat this income tax system. But for the sake of simplicity lets say that tax evasion = misrepresenting your income on your 1040.

How can you fraud the FairTax? I mean you as an individual. I understand how a company that collects the FairTax could evade it, but the reason why they would want to isn't as clear to me. To evade it, they could simply misrepresent their sales figures and pocket some of the extra tax as free income. But this could easily be sniffed out with some simple fact checking, similar to what businesses have to go through today.

Now how would an individual cheat the FairTax? They could create a fake business and claim everything as a business expense. They could try to buy things from the wholesaler whose sales have [edit] no FairTax attached. They could try to get some sort of exemption at the POS (note: I do not know if non-profit companies will also pay the FairTax, but I seem to remember that there are no exemptions to it. That is what the Prebate is for.).

In any case these things require that you either have a business front (legitimate or otherwise) to purchase from the wholesaler/supplier, or that you have some sort of tax exempt status (again I don't know if there would be said status). Is there anything else you can think of? If you can I will gladly add it to the list.

Now since 80% of the FairTax would be collected by 20% of the businesses, you can bet those businesses in the 20% (Wal-Mart, Target... etc.) will not life a finger to help you around the FairTax, as they would be watched hawkishly. So the question remains, what will be the evasion rate of the FairTax? I don't know, but probably less than the 20% of the remaining FairTax to be collected.

I say less than 20% because in order to buy from a vendor tax-free (as all qualified business will be able to) you must have the proper permits. You might need to keep those permits handy to show for transactions with your vendors. Also each business that collects the FairTax, or is hs one of these permits, must file monthly/quarterly (depending on your sales volume) statements with your state declaring how much business you did and how much FairTax you collected.

Since each business that collects the FairTax gets 0.25% of the collected amount, known as the Administrative Credit, they would have little problem declaring the full amount collected, as that would be covering the costs of collecting the FairTax (it would also be easy free money). Now each business sends the FairTax less 0.25% (or 99.75%) to the State for proper accounting. This process of sending the sales tax to the state is already done and would not be too much extra hassle. The States would collect all FairTax revenue from all businesses within its borders and take another 0.25% Administrative Credit from the FairTax collected. So the States each get an added bonus from this and would not mind an increase in revenue either. The Federal Government would then receive the FairTax minus the two Administrative Credits removed. (this is a very minor side detail but of the total FairTax collected the Feds would get 99.500625%. (FairTax - AC[1]) - AC[2])

Anyways, that is my reasoning to say that the FairTax will be easier to comply with, and easier to catch the cheaters. Both of those would mean tax evasion would go down. I say all of this with confidence because retail prices will remain very close to current prices, and may decrease in the long run. If, however, prices were to increase dramatically, I would agree with you that there would be much attempting to get around the FairTax.

[edit: Included quote-nest. I kinda wanted to keep the size down but I REALLY don't want anyone to lose track of things...]

Eomund, I just want to say two things in response to your most recent post:

1. It seems to me that almost all of your explanation can be boiled down to "the tax will be collected by/from businesses who won't cheat and will be easier to watch anyway" (please do correct me if this is wrong) which flies in the face of the reality of VAT evasion in Europe. How do you explain this discrepancy? (Especially since the VAT is more evasion-resistant than a simple retail sales tax.) I also do not see any rebuttal to my assertion that, if there is a 10% evasion rate on a 6% sales tax, there is likely to be a much greater evasion rate on a 30% sales tax, due to the 400% greater incentive to cheat.

2. You continue to say that prices would not rise very much. This is FLAT-OUT IMPOSSIBLE since the amount of taxes currently collected via the income tax and other taxes currently not incorporated into the price of goods is going to be tacked on to the price of goods. (I don't buy the argument that the personal income taxes (as opposed to, say, corporate income taxes) are part of the "embedded cost". After all, it's YOU that pays that tax, not any supplier.) You can say that the inflated prices will be compensated for by inflated paychecks, but (tax-inclusive) prices WILL rise.